Increased Productivity Is Showing Its Benefits

Just to show what a nerd I am, one of the things I look forward to every year at this time is the annual report of the Federal Reserve Bank of Dallas. The latest is just out and, once again, was worth the wait.

For those unfamiliar with the Dallas Fed report, it is much more than just a financial statement with the usual tables of debits and credits, assets and liabilities. Some years ago, it started making the first half of the report an essay on some interesting topic. Among those of recent years are essays on the dynamics of income distribution, the declining cost of living, free trade and mass customization, among other things.

These essays are always chock full of statistics, creatively presented, that usually challenge the conventional wisdom. One feature that is always a hallmark is longtime series of data. These are important because we are all myopic to some extent and tend to focus our attention primarily on the very recent past, often extrapolating into the future on the basis of what is really a very small amount of information. Therefore, it is helpful to see trends in historical perspective.

This year’s report looks at the issue of productivity. It’s an important topic because productivity has gotten a bit of a bad rap lately as a cause of slow employment growth. It seems that many businesses have been able to increase output without adding new workers by getting more productivity out of their existing labor force. Also, many of the things that economists favor to raise productivity, such as free trade, are controversial. Thus it is important for people to be reminded of why productivity is good and why it’s worth making efforts to increase it.

At the simplest level, productivity is about doing more with less — less labor, less energy, less capital. It is because each worker today produces far more than those in the past that we have a higher standard of living. According to the report, output per person is about 25 times higher today that it was in 1776. And unless productivity increases, businesses will not have the resources to increase real wages and raise future living standards.

Some workers incorrectly view productivity as a kind of dirty word. They imagine bosses prodding them to work longer and harder, with fewer breaks and vacations. In fact, productivity is all about getting workers to work less and more easily, not longer and harder. As the report notes, a key benefit of higher productivity is that we work far less today than in the past. In 1830, the average worker put in a 76-hour workweek. This fell to 60 hours in 1890, 39 hours in 1950 and just 34 hours today.

Workers are able to work less because capital, technology, education and training, and managerial innovation have combined to raise output per hour. Obviously, one man on a tractor can grow far more crops today than one with only a mule to pull the plow 100 years ago. Moreover, today’s farmers have the benefit of superior seeds, fertilizer, irrigation and other means of raising agricultural output far above their ancestors. That is why less than 3 percent of the labor force works in agriculture today, versus more than 90 percent in 1800, yet it is still able to feed the entire country and have plenty left over to export.

Historically, labor productivity in the United States has grown 2.3 percent per year. At this rate, living standards will double every 31 years — about a generation. Thus every generation will live about twice as well as the previous one at this rate. But after 1973, this historical trend took a nosedive for reasons economists are still unclear about. From 1973 to 1995, productivity increased only 1.5 percent per year. At this rate, it would take 48 years for living standards to double.

Since 1995, productivity has rebounded and even accelerated to 3.2 percent per year — enough to double living standards in just 22 years if sustained. Just as economists don’t know for sure why productivity fell after 1973, they are unsure why it jumped after 1995. One explanation is that computers and the Internet made many types of work much easier and raised output.

I’m a good example. Because of the Internet and lower costs for office equipment like Xerox machines, I can work at home. At a minimum, this saves me two hours per day I would otherwise spend commuting. Thus I get two hours a day that I can now spend working productively, rather than wasting that time sitting in traffic. Of course, I also save gasoline and wear and tear on my car, and avoid a lot of unnecessary stress. Multiply my experience a million times, and it adds up to a real gain for the economy.


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