Productivity and Layoffs

One reason I like reading Brad DeLong is that he’s never afraid to admit a mistake — even when it isn’t technically a mistake, just a question of interpretation. Here is his comment on productivity growth of 9.5% (annual rate) in the third quarter:

“Back in the 1930s there was a Polish Marxist economist, Michel Kalecki, who argued that recessions were functional for the ruling class and for capitalism because they created excess supply of labor, forced workers to work harder to keep their jobs, and so produced a rise in the rate of relative surplus-value.

“For thirty years, ever since I got into this business, I have been mocking Michel Kalecki. I have been pointing out that recessions see a much sharper fall in profits than in wages. I have been saying that the pace of work slows in recessions–that employers are more concerned with keeping valuable employees in their value chains than using a temporary high level of unemployment to squeeze greater work effort out of their workers.

“I don’t think that I can mock Michel Kalecki any more, ever again.”

Productivity is the amount of output per unit of input. The productivity numbers you see quoted in the media are almost always growth in labor productivity — the rate at which the amount of output per unit of labor input (hour worked by a human being). In the long term, productivity growth is perhaps the most central component of rising material standards of living, since in aggregate it means that we get more stuff for working the same amount of time. (GDP growth on its own doesn’t have this effect, because the population could be growing, or we could be working harder and thereby losing leisure time.)

In the short term, though, productivity growth can swing all over the map. Productivity often falls during a recession because output falls faster than companies lay off workers and spikes afterward because output is growing right while companies are laying off workers (and companies put off hiring until the recovery is well underway). This time the recession lasted long enough that companies had time to lay off millions of workers and productivity growth started shooting up in the second quarter (6.9% annual rate).

One underlying issue is that not everyone in a company contributes at the same rate. When companies have layoffs, they theoretically try to lay off the less-productive people (although this often does not happen), which should cause productivity to go up. Having been a management consultant for several large companies, I can say with a fair degree of confidence that these companies could have laid off a significant number of people without any noticeable fall in output. In addition, because the rate of output today depends in a complex way on work done in previous quarters (imagine if GM laid off all its design people — the factories could keep humming for a while), sometimes you can keep output up even with less labor input in the current quarter; you don’t pay the bill until later. Then there’s the effect DeLong talks about: companies can use a bad labor market as a way to squeeze workers harder. This is why quarter-to-quarter numbers can be very noisy.

However, repeated layoffs don’t work as a long-term strategy, and at some point you reach a point where you can’t sustain output with fewer people, and companies start hiring again. So in the long term, productivity growth relies on things like improvements in technology and business processes.But in the short term it’s often just noise.

Originally published at The Baseline Scenario and reproduced here with the author’s permission.