Friday, 6 November 2009

How can rising productivity mean more staff?

This BBC article asserts that...
Productivity, as measured by output per hour of work, rose at an annual rate of 9.5% between July and September.

The data suggests that firms, which have cut jobs in the downturn, are now increasing their output, which may in turn lead to them needing more staff.
This is truly a paradox. Greater productivity normally means firms need fewer staff - until, eventually, rising income increases aggregate demand, and then the laid-off people are employed in other sectors.

The article seems to be another example of the equilibrium fallacy*, where a reversion to equilibrium is mistaken for a first-order effect.

That is, firms cut staff because they had insufficient demand for their products - naturally, getting rid of the least productive staff. The remaining workers are more productive on average, and the reduction in output is less than the reduction in staff. This doesn't imply at all that either demand or output is increasing. If productivity had increased without any staff cuts, then output would have risen too. But that's not the case.

The viewpoint is slightly refined later in the article, where a Barclays economist says:
"...businesses will have to start to increase hours worked and payrolls around the turn of the year since they cannot expect their current work force to sustain such rapid productivity growth."
Maybe so. But it's pretty odd to suggest that productivity growth is the cause of an employment increase.

* This page has a different interpretation of "equilibrium fallacy" but the phrase doesn't seem to be in common use - anyone want to suggest an alternative?


Don said...

My interpretation: During a Proactivity Run, based on Fisher, employers proactively shed jobs greater than the drop in demand warrants. For a time, there is increased productivity. For a time.

Don the libertarian Democrat

Leigh Caldwell said...

I don't think there's any controversy about that - in most models, it makes perfect sense for productivity to go up when people are laid off.

I was intrigued by the quote on MR yesterday: "Workers mostly build organizational capital, not final output. This explains high productivity per 'worker' during recessions."

Comparing the US and the UK is instructive: the US tends to have much greater employment losses for a given reduction in output than the UK. If a 1% output fall is associated with 2% more unemployment, productivity will go up by definition. While in the UK, our 5% output fall has led to only a 3-4% increase in unemployment, meaning that our productivity has gone down.

Unless, that is, Garrett Jones is right. Maybe we are building our companies for the future.