Productivity Gains: Never Bad,
Even for American Workers

The argument is simple and convincing: Driven by an inexorable urge to cut costs and boost profits, business buys the latest labor-saving technology and fires workers. Repeated by companies across the economy, these increases in productivity yield a "jobless recovery" like the one the U.S. is suffering. As technology gets better, business gets by with still fewer workers. What jobs U.S. employers can't automate, they move to China and India. The "jobless recovery" persists. Rising productivity boosts profits. American workers suffer.

Kurt Vonnegut Jr. saw it coming. Inspired by what he saw as a P.R. man for General Electric, he published a novel in 1952 called "Player Piano" that described a world in which machines do nearly all the work that people once did. The government's Reconstruction and Reclamation Corps -- Reeks and Wrecks -- provides make-work for the displaced humans.

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The argument is simple, convincing -- and wrong. Surging growth in productivity, the amount of stuff we make for each hour of work, is not the cause of our current economic malaise. Wishing for slower productivity growth so we can have more jobs is foolish.

"The notion that jobs are lost permanently is a mistake," Nobel laureate Robert Solow said at a recent forum convened by the Economic Policy Institute, a left-leaning Washington think tank. "Particular jobs disappear. But the need for labor is always there as long as we're not saturated with goods and services. Over hundreds of years, productivity in the industrial world has increased very rapidly. There has been no longer-term increase in the amount of unemployment and there need not be now. We simply have more room to expand if we can improve our productivity."

Economists of all stripes believe that. But then few economists are unemployed. In the past year, the business output has increased by 2.9%, while workers have put in 0.9% fewer hours. Productivity grew by a strong 3.8%. About 400,000 jobs were lost, and unemployment rose to a nine-year high.

So it's easy to draw a line from higher productivity to higher unemployment. But history suggests the economy doesn't work that way. Productivity grew better than 3% a year between 1962 and 1968, and so did employment. It grew rapidly during the late 1990s and unemployment fell to the lowest levels in a generation. And we've had periods of sluggish productivity growth -- the late 1970s, for one -- in which business also hired readily. The current combination of rising productivity up falling employment down is unusual.

Rising productivity means the economy can grow faster, but it also means the economy must grow faster to reduce unemployment. Productivity growth does destroy some jobs, no doubt about that. Three quarters of all Americans worked on farms in 1800. Only 40% did in 1900. And, today, because American farms are increasingly efficient and mechanized, less than 3% of workers feed the rest of us. The evaporation of farm jobs brought wrenching change to farm families and rural towns, but it allowed more Americans to work in factories and hospitals, teach in schools and play in rock bands.

Only by improving productivity can an economy raise wages and free workers to staff new industries. Productivity growth expands an economy's capacity to supply goods and services; it allows us to make more with less effort. It's why we have more things than our grandparents did.

That sounds good. So why are so many people unemployed? Because the economy isn't yet creating enough new jobs to replace those lost as businesses deploy technology or reorganize. Why aren't businesses hiring more? Because consumers, businesses and foreigners aren't buying more. Companies would make and hire more if they thought they could sell more.

The unpleasantly high unemployment rate reflects a wide gap between the U.S. economy's capacity to supply goods and services and current demand for them. This isn't a permanent problem. It's a temporary, albeit painful, one. Closing the gap is the job of macroeconomic policy. The stated aim of the folks who cut taxes, increase spending and reduce interest rates is to increase demand so businesses will resume hiring. That is the right goal. Whether the Bush-backed tax cuts are the right ones to stimulate demand is a separate, and hotly debated, question.

But the alternative is distinctly unappealing: constraining supply instead of boosting demand. The government might mandate that everyone work at half speed so more workers will be employed to make the same amount of stuff. That would spread the misery more evenly. But decreasing productivity growth can never be the right answer to an economy's woes.

Updated August 21, 2003 1:51 a.m.