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Holding back job growth? Workers' awesome output

By Neil Irwin
Washington Post Staff Writer
Wednesday, March 31, 2010; A01

When workers become more efficient, it's normally a good thing. But lately, it has acted as a powerful brake on job creation. And the question of whether the recent surge in productivity has run its course is the key to whether job growth is finally poised to take off.

One of the great surprises of the economic downturn that began 27 months ago is this: Businesses are producing only 3 percent fewer goods and services than they were at the end of 2007, yet Americans are working nearly 10 percent fewer hours because of a mix of layoffs and cutbacks in the workweek.

That means high-level gains in productivity -- which in the long run is the key to a higher standard of living but in the short run contributes to sky-high unemployment. So long as employers can squeeze dramatically higher output from every worker, they won't need to hire again despite the growing economy.

On Friday, the Labor Department will release a closely watched March employment report expected to show the strongest job growth in three years, driven by stabilization in the economy and a rebound from February snowstorms.

A strong March job-growth number -- at a time when the economy is growing at only a middling pace -- would suggest that the productivity boom has largely run its course. Regardless, the question of what caused the burst in workers' efficiency is one of the great unanswered questions of the expansion and has huge stakes for the economy over the coming year.

"It is an episode that we're going to -- we, economists in general -- are going to want to understand better and look at for a long time," Federal Reserve Chairman Ben S. Bernanke said at a hearing last week in which he described the productivity gains as "extraordinary" and acknowledged he had not foreseen them.

Businesses have certainly not been investing in new equipment that might enable workers to be more efficient -- capital expenditures plummeted during the recession and are rebounding slowly. And the structural shifts occurring in the economy are so profound that one would expect productivity to be lower, rather than higher, as people need new training to work in parts of the economy that are growing, such as exports and the clean-energy sector.

So what's happening? As best as anyone can guess, the crisis that began in 2007 and deepened in 2008 caused both businesses and workers to panic. Companies cut even more staff than the decrease in demand for their products would warrant. They were hoarding cash, fearful that they wouldn't have access to capital down the road.

When demand for their products leveled off in the middle of last year, the companies could have stopped cutting jobs or even hired people back. But they didn't -- payrolls have continued declining.

Instead companies squeezed more work out of remaining employees, accounting for a 3.8 percent boost in worker productivity in 2009, the best in seven years. Which raises the question: Why couldn't companies have achieved those gains back when the economy was in better shape? The answer to that may lie on the other side of the equation -- employees.

Workers were in a panic of their own in 2009. Fearful of losing their jobs, people seem to have become more willing to stretch themselves to the limit to get more done in any given hour of work. And they have been tolerant of furloughs and cutbacks in hours, which in better times would drive them to find a new employer. This has given companies the leeway to cut back without the fear of losing valuable employees for good.

Consider Siemens Industry, a 33,000-employee U.S.-based division of the global conglomerate. It makes rail cars and lighting systems for hospitals, among many other products. As the economy turned south in late 2008 and dragged down sales of Siemens' big-ticket items, the company looked elsewhere to improve profitability.

One answer was to merge three corporate entities and unify functions such as procurement, information technology, human resources and marketing. The changes were completed over the course of 2009.

"There's no question that when revenues are down, you start scrutinizing expenditures with a sharper eye," said Daryl Dulaney, chief executive of Siemens Industry. "And the deeper the downturn, the sharper your eye and the bolder steps that you can take."

In the 1990s and early part of the 2000s, strong productivity gains came from massive investment in information technology and new equipment, said James Manyika, a director of the McKinsey Global Institute, the research arm of the giant consulting firm. At the peak of the last boom, investment in equipment and software was nearly 10 percent of gross domestic product; in the middle of the 2000s, it peaked at 8 percent.

That means that instead of simply harvesting the returns from years of heavy investment, firms are finding other ways to become more efficient. "Companies are taking a fresh look at how to organize people, at how people actually work," Manyika said. "And if you look at the number of part-time furloughs companies have done, people have been much more willing to accept it."

Those potential explanations raise the possibility that the job market could experience more of a rebound over the coming months than forecasters are now expecting.

Although businesses are unlikely to reverse the changes they've made in the coming months and years -- if you've suddenly become more efficient, why change unless you have no choice? -- there is little reason to think they can maintain those extraordinary productivity gains in a more normal economy.

After all, if the boost depended on executives being panicked and workers having no option but to live with the changes, then the end of the deep crisis must mean that productivity gains will return to normal. We may even see below-trend productivity growth for a while, if some of what happened in 2009 was executives speeding up changes they would have made anyway over a longer period -- essentially borrowing productivity from the future.

Friday's jobs report won't offer any definitive evidence, but if the job growth number is strong, then the long, tough road the American labor force has walked over the past two years may be starting to get a little easier.

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