(and no, I'm not some Democrat hack, I'm just quoting commonly accepted mainsteam economic theory. Just like Alan Greenspan in the article below)

Productivity grows, job creation slows

American workers toil harder with new, higher-technology tools
November 7, 2003

BY KEN MORITSUGU
KNIGHT RIDDER NEWSPAPERS

WASHINGTON -- At Purafil Inc., a small Georgia air pollution-control equipment company, a single computer entry by a salesperson accomplishes tasks that would have taken three or four people a few years ago.

At Intel Corp., robots instead of people move semiconductors through production at the Silicon Valley giant's latest factories.

"The number of people walking around is much smaller than it was in the past," said James Jarrett, an Intel vice president.

Big and small, American companies are getting more production out of workers. The U.S. economy is going through an explosion in productivity that holds out the promise of improved standards of living but also, at least in the short term, contributes to slower job growth.

Labor productivity, the amount of output per hour of work, grew at an eye-popping 8.1-percent annual rate this summer, the Labor Department reported Thursday. Since the recession officially ended in late 2001, productivity has risen 5 percent a year, far faster than it usually does.

In a speech Thursday, Federal Reserve Chairman Alan Greenspan described that performance as "a startlingly large rise in productivity." He added that the rise gave many businesses "the temporary ability . . . to meet increases in demand while paring existing workforces."

The high rates of productivity growth won't last, because they partly reflect a temporary situation. The economy is rebounding, but companies haven't been confident enough about the future to hire. So they've stepped up production without adding workers. In short, workers are working harder.

That kind of productivity growth will subside if the recovery lasts. Business managers will become more confident. Also, they can squeeze only so much added production out of existing workers.

But beyond the temporary productivity boost, many economists say underlying productivity growth, after two decades of stagnation, has accelerated from about 1.5 percent a year in 1997 to about 2.5 percent today.

Why that's happening is hard to pinpoint.

One theory is that the heavy investments in computers and software that companies made during the high-tech boom in the late 1990s might just be paying off now.

The thinking is that it takes time to phase out the old way of doing business and to figure out how best to use the new technology.

"Only over time have managers learned how to reorganize their production and distribution so as to take full advantage of these new technologies and thus enhance the productivity of capital and workers," Federal Reserve Gov. Ben Bernanke said in a speech Thursday at Carnegie Mellon University in Pittsburgh.

Purafil is one of many companies benefiting from new technology. When a salesperson enters a new order, it automatically shows up at the factory, where a computer can spit out a purchase order for the parts that Purafil needs to buy from suppliers to complete the order.

"These functions, up to about four, five, six years ago, were done semiautomated or by hand," said Bill Weiller, the chairman of the 75-employee company in Doraville, Ga. "Now, one entry does what three or four people did in different parts of the factory."

So as sales picked up this year, his company's productivity boomed.

"The only place where I need to increase personnel is in the real manufacturing area and shipping, where you literally have to handle products," Weiller said. "I no longer have to hire more accountants and administrative support staff."

Questioning statistics
Not all economists are convinced that underlying productivity growth is rising. Measuring productivity is difficult, particularly in services, so the statistics might be off.

But if productivity growth has accelerated, it means two things. It might take longer for hiring to pick up in this recovery -- as it already has -- because companies don't need as many workers to expand production. Over time, living standards should rise.

"There's a temporary impact on jobs, and that's what we're seeing now, but ultimately it will mean greater incomes for everyone," said Mark Zandi, the chief economist at Economy.com, an economic analysis firm in West Chester, Pa.

Initially, higher productivity generates higher profits for companies as they produce more with the same labor costs.

But companies then generally start using profits to hire more employees and expand operations, which generates more growth and higher wages. Consumers benefit from lower prices, because companies in a competitive economy will cut their prices, settling for a lower profit margin to try to gain market share.

That doesn't mean there won't be losers, namely those workers who are no longer needed.

"They're productivity-gained out of a job," said Chris Varvares, an economist at Macroeconomic Advisers, an economic forecasting firm in St. Louis.

The Labor Department's third-quarter productivity report is on the Bureau of Labor Statistics' Web site at www.bls.gov/news.release/prod2.toc.htm. Harold Brubaker of the Philadelphia Inquirer contributed to this report.