Productivity Is Easing the Pain

Business Week

Profits are healthier and job losses fewer than in previous downturns.
The reason:
Businesses’ swift response
to falling demand
is making productivity unusually strong

by James Cooper

The productivity revolution of the late 1990s changed forever the way U.S. businesses operate. Driven by technology and overseas competition, companies radically altered how they manage purchasing policies, inventories, production processes, and, perhaps most important, labor. The U.S. workforce has become much more flexible, allowing businesses to respond faster to changes in demand, to the benefit of businesses and workers. Even now, surprisingly strong gains in efficiency are playing a key role in helping the economy bear up under great stress.

Productivity, measured as output per hour worked in private nonfarm businesses, increased 2.8% through the second quarter from a year earlier. That’s unusual on two counts. Efficiency typically slows when the economy weakens, but this time it has sped up, from 1.1% annually over the previous two years. Plus, given that hours worked have declined 1% over the past year, productivity gains have accounted for all of the 1.8% advance in economic growth (chart).

Greater use of part-time workers, especially in manufacturing and retailing, is a big part of the job market’s new flexibility and recent gains in productivity. From 1990 to 2000, the share of temporary workers on payrolls doubled, to about 2%. During the 2001 recession, temps accounted for 20% of payroll losses. So far this year, temp jobs have accounted for 40% of all losses. Also, businesses are showing a greater tendency to cut hours rather than lay off workers. So far this year, employees working part-time have jumped by nearly a million, and the number saying they are doing so because of slack business conditions has soared to a record level.

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