Good Economy. Bad Job Market. Huh?

ECONOMIC VIEW

Sunday, September 14, 2003

By Louis Uchitelle

NYT Business Writer

Rarely in the past has productivity held up in the absence of robust business investment, which is certainly absent now. What saves the day are the delayed productivity gains from constantly devising new ways to use the huge earlier investment in technology, says Erik Brynjolfsson, an economist at the Sloan School of Management at the Massachusetts Institute of Technology.

"It is as if thousands of invisible factories were built all over America, not made of bricks and mortar but of business processes," he said. "Now these factories are being pressed into action."

He cites as examples Dell's skill at online computer sales and Wal-Mart's system for tracking inventories in every store and automatically restocking shelves. My own favorite is the A.T.M.-like machines now at airports that deliver boarding passes without the intervention of a counter clerk.

NYT
T was like waiting for Godot. We waited for years for productivity to accelerate, and now, unlike Godot, who never showed up, that day has finally arrived. Productivity is soaring, holding out the promise of rising prosperity. Unfortunately, now we're waiting for the prosperity to kick in. A second term for President Bush could ride on whether it does, and how soon.

The United States economy has not experienced anything like this since World War II. Normally, a spike in productivity is accompanied by an even greater spike in demand. Simply put, productivity rises when workers produce more and sell more each year, and do so without putting in extra hours. The production part is working just fine. The demand, however, is lacking.

That, in turn, is having nasty repercussions for jobs and incomes. The increase in productivity has allowed many employers to cut payrolls or workers' hours. Why pay six people to assemble 90 toaster ovens an hour when only four workers are needed to assemble the 60 ovens that can be sold? Better yet, why not speed up the line and cut the four workers to three, each one forced to work faster? But that leaves three workers unemployed, without income and unlikely to buy toaster ovens -- or much else -- until they get work again. Gradually, the demand for toaster ovens falls to 50, then 40, and another worker is laid off, or everyone's hours and pay are cut. And demand falls even more, producing its own negative dynamic.

"I hesitate to say that high productivity is bad," said William C. Dudley, director of domestic economic research at Goldman Sachs. "But if it is high, then you need more demand to generate employment, and if you don't get it, then the economy stalls."

Consider what happens when demand outstrips productivity. The toaster oven company installs a computer-controlled system that delivers parts for the ovens directly to the assembly line, simplifying the work of the six assemblers enough for them to raise production to 100 ovens an hour. That generates more sales revenue to distribute in wages, not to mention profits. The raises encourage spending, and as the demand for toaster ovens inches up to 110, a seventh person is hired.

That is the way recoveries worked in the past, as employment and incomes rose and people engaged in the spending they had postponed during the recession. But demand this time is not firm enough. Even an economy propped up by tax cuts, military spending and other one-time fixes is expanding lately at only a 4 percent annual rate. That is a lot by past standards, but not enough when productivity has been surging at a 4.4 percent annual rate for 18 months.

As a result, the nation's private-sector employers are behaving as if they were caught in a recession, which they very well may be if they continue to act this way. Unable to sell all they can produce, they have reduced by 1.1 percent the total number of hours worked since the start of the recovery in November 2001, and they have put a lid on raises for most of the nation's 108 million jobholders. Wages are rising, but hours are disappearing and the combination leaves weekly pay barely keeping up with inflation, according to the Bureau of Labor Statistics.

Some, including members of the Bush administration, counsel patience: demand, they say, will soon pick up enough to outstrip productivity. Job creation will then kick in, and the recovery will settle into a normal pattern.

Maybe. But the optimists aren't considering just how much demand is needed to outrun the unusual speed-up in productivity.
(More: NYTimes.com)

2003 © The New York Times Company.

Dan