Productivity - policies and problems

American workers produced in 1983 goods and services worth on the average $19.50 an hour in all private industry and $22.50 per hour in manufacturing alone. That's more than twice as much as each worker produced 35 years ago, measured in dollars corrected for inflation. And the United States still maintains its lead as the most productive nation in the world, although some nations are catching up because their productivity is growing faster.

In 1983, American workers were 7 percent more productive than workers in Germany, 39 percent higher than Japanese workers, and 45 percent higher than those in the United Kingdom according to Labor Dept. figures on Gross Domestic Product per person employed.

Productivity gains are an engine of progress and contribute to a higher standard of living for all Americans when the gains lead to higher wages and benefits rather than only to higher profits. And higher wages increase consumer purchasing power, which is essential to keep the economy growing and healthy. Of course, higher wages and benefits are necessary to raise living standards, and workers' gains are best achieved when employees have a union to represent them. Unions have also been shown to contribute substantially to higher productivity. Why Productivity Grows

An understanding of what causes productivity to grow is important to the development of improved economic policies. A key ingredient is a healthy economy with rapid business expansion. The strongest productivity growth is achieved when unemployment is falling and consumer demand is strong, because that climate stimulates the factors that lead to higher productivity.

The use of high interest rates and tight credit by the government to fight inflation tends to slow the growth of production and investment in the kinds of activities that raise productivity.

The factors contributing to higher productivity include investment for expansion and modernization of plant and equipment, on-the-job training programs, and school and university programs to train workers in the newest skills for growing job opportunities. Also, research and development spending leads to new products and production processes. Public infrastructure development, consisting of transportation systems, sewer and water systems, schools, and other public investment, provides support facilities essential for production of goods and services.

In a recent study of the relationship between productivity growth and output growth, Keith McKee and Carol Sessions of the Illinois Institute of Technology concluded that "most productivity improvement occurs because of an increase of output by the nation or by individual industries." Looking at U.S. industries they concluded, "Some industries did well and some poorly, but the first order trend was that productivity increased at the same rate as the rate of increase in output. Such a strong correlation was not anticipated and appears to indicate that the trend found for U.S. industries seems to follow that for the industrial nations." Invest and Modernize

Investment for expansion and modernization of plant and equipment has more than kept up with the growth in the labor force, meaning that each worker works with far better equipment than in the past. According to the Bureau of Labor Statistics measure of potential capital services, the potential service available from plant and equipment has gone up 165 percent per hour worked since 1949. Although it declined in 1976-78, this measure began rising again in 1979 before dropping again in 1983.

The share of the nation's income devoted to investment in plant and equipment has been gradually rising since World War II as shown by the Commerce Dept.'s survey of Plant & Equipment Expenditures. Investment as a share of GNP rose from about 9.5 percent in the 1950s, hitting 11.2 percent in 1979 and 1980. The investment share fell during the recession to 9.2 percent in 1983.

Recent data, however, show contradictory investment figures, both weak and strong. The Commerce Dept.'s Plant & Equipment Survey shows investment at 9.2 percent of GNP in the first six months of 1984, reflecting no improvement over 1983. Another series from the Commerce Dept., on Fixed Nonresidential Investment, shows strong growth in investment registering a 11.5 percent share compared to 10.5 percent in 1983. Why the discrepancy exists and which series is more accurate remains to be determined.

A study by Edward Denison, a leading productivity expert, found that increases in the amount of plant and equipment account for about 15 percent of productivity growth in recent decades.

Investment for modernization of plant and equipment has gradually improved the quality and productive potential of the nation's workplaces, although some companies and industries have fallen behind. Plant and equipment have become increasingly more modern since World War II. The average age of plant and equipment in U.S. manufacturing fell from 13.9 years in 1945 to 9.0 years in 1981 before rising to 9.2 years in 1983 as a result of the recession, according to Commerce Dept. figures. Education, a Vital Factor

The nation's commitment to education has improved the quality of the workforce, making a vital contribution to productivity. Better education through schools and training programs accounts for 20 percent of U.S. productivity growth in recent decades, according to Edward Denison's study. Advances in knowledge from all other sources contribute an additional 54 percent. Education provides the basis for inventions, new materials, and the improved flow of work from one operation to another. And education supplies the workforce with the basic skills for applying such advances in technology and know-how.

The 1.7 million patents issued in the United States since World War II testify to the scientific progress of the American people and to their ability to consistently develop new ways for producing more and better goods and services. America's R&D Leadership

The United States is the world's leader in the development of new technology, and it spends more on research and development than Japan, France, and Germany combined. The National Science Foundation reports that in 1982, the United States spent $80 billion on R&D compared to $26 billion for Japan, $18 billion for Germany, and $11 billion for France. West Germany devotes a slightly larger share of its income to R&D -- 2.81 percent of its gross national product compared to 2.63 percent for the United States. R&D accounts for about 2.4 percent of GNP in Japan and 2.1 percent in France. Scientists and engineers make up a larger share of the labor force in the United States than in any major competing country.

Spending on R&D has gradually expanded over the years. Overall spending for research and development rose to record levels each year after 1976 following a slump during the recession of 1974 and 1975. About $88 billion dollars, more than ever before, was spent in 1983 by private industry, universities, and government, with the federal government contributing 46 percent of that amount.

Scientific research and development helps raise productivity, through the development of new machines, new production methods, and new products. As with other factors contributing to productivity, research and development spending is much stronger when the economy is healthy.

Investment by federal, state and local governments makes a large contribution to improved productivity. Schools, colleges and universities increase the skill and knowledge of the workforce. Investment in transportation systems, public power projects, sewer and water systems, and police and fire stations provides the basic facilities necessary for the production of goods and services. Government antitrust enforcement of competition strengthens private institutions, also making possible higher productivity.

Elimination of discrimination on the basis of race, age, and sex also helps to raise productivity. Discrimination prevents people from using their talents to their utmost potential and results in lower overall productivity.

Education, training, investment, and research and development are the basic, long-run causes of the rise in productivity. At any given time, output per work-hour depends on how efficiently the economy is using its plant, equipment, and labor. A recession with layoffs and unused equipment results in a drop in productivity. Putting workers as well as idle machinery and equipment back to work will result in a rise in productivity. A New Economic Climate

Economic circumstances that affect productivity growth have changed dramatically in recent decades. Increased foreign competition, high interest rates, more rapid fluctuations in business conditions, and the export of U.S. technology are major problems with which America must cope if the economy is to realize its productive potential.

Foreign competition increasingly comes from countries that give subsidies and assistance to their industries to help them win the competitive battle in world markets. Leading industrial countries have adopted coordinated industrial policies that increase the viability and competitiveness of their industries. High Interest Rates

Interest rates have been at historically high levels during the past five years. Government policy of encouraging high interest rates to fight inflation, increasing demands for credit and the huge federal budget deficit have pushed up interest rates and thus made it more costly to finance new plant and equipment. The prime interest rate charged to large corporate borrowers rose from 6.8 percent in 1977 to a high of 18.9 percent in 1981 and was still over 11 percent in November 1984.

The real rate of interest, which is the actual rate less the rate of inflation, is thought by many experts to be a better indicator of the burden of interest rates on borrowers. The real rate of interest to large corporate borrowers averaged 8 percent over the past four years compared to 1.1 percent in the 1970s. The high cost of capital has put American producers at a great disadvantage in competing with foreign producers.

A study by George Hatsopoulous, a Director of the Federal Reserve Bank of Boston, argues that the high cost of capital is America's biggest handicap in competing with other nations. That study shows the real cost of capital in the United States at three times the level faced by Japanese business. According to the Hatsopoulous study, in 1981 Japan had a cost advantage of about $2,300 on a product costing $10,000 due to the lower cost of capital in Japan, in addition to the advantage due to lower labor costs.

The high interest rates have also raised the value of the dollar relative to the currencies of other nations, making it more difficult to export and to compete with imports. The higher U.S. interest rates are a major factor in the deterioration of U.S. competitiveness.

High interest rates and other nonlabor costs including profits and depreciation have been rising much faster than labor costs in the 1980s. From the first quarter 1980 to the third quarter 1984, unit nonlabor costs in private business rose 37 percent compared to a 24 percent rise in unit labor costs.

The ups and downs of the business cycle have become more frequent in recent years producing increasingly serious recessions and disappointing recoveries. The recessions have reduced consumer demand and created greater uncertainty for new investment.

New technology developed in the United States (often at taxpayer expense) is sometimes made available to foreign competitors as quickly as in the United States, thus eliminating a U.S. competitive edge and export opportunities. An example of this transfer of technology is the robotics industry. The United States is at the fore of the development of robots, but several U.S. companies producing robotics have licensed foreign manufacturers to produce robots invented in this country. Many robots introduced into Japanese industry are made in Japan with the permission of the U.S. companies that invented them, and Japan may become a major source of robots for the United States. Industrial Policy

These changes in economic circumstances have prompted the AFL-CIO to give support to the proposals for an industrial policy to deal with the factors adverse to growth in production and productivity. Adoption of an industrial policy could signal a national commitment to the rebuilding of the industrial base as the foundation for long-term balanced growth and the fulfillment of the nation's commitment to a policy of full employment.

To that end, the AFL-CIO supports the proposal for a National Industrial Policy Board -- including representatives of labor, business, academia, the public, and government -- which would identify industries that are vital to national economic growth and employment and the industrial development priorities that should be assisted through targeted policies. The Board would oversee a National Industrial Development Bank, patterned after the Reconstruction Finance Corp. which operated from the late 1930s to about the mid-1950s. The bank would be authorized to make and guarantee loans to finance approved reindustrialization ventures. Who Gets the Gains?

The success of the American economy is due in large part to a strong base of consumer purchasing power. Higher U.S. wages enabled America to lead the world in the adoption of mass production. Mass production is both a cause and result of high wages.

If wages and benefits fail to rise enough to share in productivity gains, then profits, dividends, executive salaries, and the like rise disproportionately. Wealth becomes more concentrated in the hands of a relatively small elite, causing buying power to lag and creating an imbalance that leads to a drop in sales, a piling-up of merchandise, production cutbacks, layoffs -- and ultimately another recession or depression.

There is nothing automatic to assure that the benefits of productivity are broadly and equitably distributed. Therefore, rising productivity presents the potential for trouble as well as the potential for progress.

In the 1920s, rising productivity was translated into booming business profits, but wages and buying power and living standards of the great mass of American people lagged far behind. Sales of goods and services did not increase as fast as they could be produced. Profits also spilled over into speculation in commodities, real estate, and corporate stocks. This led to a seriously lopsided, unbalanced economy which was a major cause of the 1929 crash and the Great Depression of the 1930s. Labor Costs and Productivity

For the majority of consumers, wages are the source of the buying power necessary to sustain a healthy economy. But raising wages does not necessarily mean raising labor costs, because they are not the same thing. For example, a 5 percent pay raise for workers in a "widget" factory might be expected to raise the labor cost for widgets by 5 percent. But if widget output per worker-hour also goes up 5 percent, there is no change in labor cost per widget.

When more is produced for each hour of work, there is an increase in the total amount of goods and services in the economy. Who gets those additional goods and services depends on how the gains of productivity are divided. For example, if productivity increases by 5 percent, workers must get a 5 percent wage increase just to maintain their share of the income. Rental income, interest income, executive salaries, dividends and profits could all increase by 5 percent since the total output has gone up by 5 percent.

So it is a mistake to identify labor costs too closely with wage rates. Labor costs may go down even when wages rise because of productivity gains.

Increases in the cost of living that reduce worker buying power also erode the potential for producers to sell their goods, so wages have to increase as much as the increase in prices and productivity just to maintain workers' share of national buying power.

Productivity gains are a source of higher wages, shorter hours, more holidays and longer vacations, earlier retirement, and general improvement in living standards. But because higher productivity means producing more goods and services over the same number of hours worked, productivity increases can also have destructive effects on workers and their jobs. Thus, workers have a vital interest in how productivity is shared. Key Role of Unions

Collective bargaining plays a crucial role in dealing with both the dangers and opportunities of increased productivity. The flexibility of collective bargaining helps workers and their unions settle with employers on reasonable and humane protections against the adverse effects of new production methods and to share in the gains of productivity.

But the union role of protecting workers from the adverse impact of productivity is only one dimension of the collective bargaining agreement, which also does much to stimulate productivity. The needed protections, for job security and in such areas as job safety, can themselves contribute substantially to productivity gains by reducing lost work time. And the stability brought to the workforce through acceptance of seniority, the grievance procedure or other standard features of a collective bargaining contract can contribute to worker morale and consequently to productivity.

The effect of unions is vividly shown in studies done over the last few years. Harvard economists Richard Freeman and James Medoff examine the evidence in a recent article, "Trade Unions and Productivity: Some New Evidence on an Old Issue," published in the Annals fo the American Academy, May 1984. They conclude that "Econometric investigations have yielded new evidence concerning collective bargaining's impact on productivity. These findings indicate that in many sectors, in particular manufacturing and construction, unionized work places are on average more productive than nonunion ones."

The relationship between labor and management is clearly an important factor in productivity. In general, the labor management climate where unions are firmly established has gradually improved since World War II and is reflected in the reduction in days lost due to strikes and the increase in the use of arbitrators and mediators to solve disputes.

Management and labor in some cases have adopted programs for labor-management cooperation in order to secure a better working relationship and enhance the opportunity to improve efficiency. America's Ability to Compete

The competitiveness of American industry is aided by the higher productivity of American workers and attempts to bring about a better working relationship between workers and their employers. Despite these factors, the nation faces a major crisis in international competitiveness.

America's crisis in international trade has intensified over the last three years. Trade in manufactured goods was in surplus as recently as 1981. In 1983, exports fell more than $11 billion and imports rose $15 billion. For manufactured goods, the deficit of $38 billion in 1983 was more than two and one-half times the deficit of 1982. Projections based on the first ten months of 1984 are for a staggering trade deficit of over $90 billion in manufactured goods for the full year.

A sharp rise in the dollar after July 1980 caused severe damage to the nation's competitive ability. From July 1980 to September 1984, the value of the dollar rose 72 percent against the currencies of major trading partners. This means higher costs, including higher unit labor costs. The rise in the value of the dollar made U.S. exports more expensive in foreign countries and made imports cheaper. The rise in the value of the dollar means that a U.S. manufacturer roughly competitive in 1980 might be at a 72 percent cost disadvantage today.

The primary cause of the rise in value of the dollar is the high level of U.S. interest rates. Foreign investors, wanting to take advantage of higher U.S. interest rates, are trading their currencies for dollars and thereby bidding up the price of the dollar.

The sharp rise in the value of the dollar followed a decade in which unit labor costs in the United States rose at a much slower pace than those abroad. Even though productivity was rising more rapidly abroad, unit labor costs -- that element that effects prices -- were rising more slowly in this country because of slower increases in wages and the impact of exchange rates. Unit labor costs in the 1970s rose 171 percent in Japan and 241 percent in Germany compared to a much smaller rise of 80 percent in the United States. Despite this dramatic improvement in competitiveness of U.S. products, the trade deficit grew worse during that period because foreign governments were so successful in subsidizing their own exports.

It would be unreasonable to expect productivity increases to cope with unfair trade practices or to grow enough to make up for the sudden and tremendous rise in value of the dollar. It would also be unreasonable to expect workers to make wage concessions to make up the difference. It would take wage cuts of 15 percent per year each year for the last four years to make up the difference. A reduction in interest rates would bring about considerable relief for American manufacturing industries. Productivity Measurement

The measurement of productivity for the U.S. economy is done by the Bureau of Labor Statistics (BLS) of the Dept. of Labor. BLS publishes productivity measures quarterly and yearly for the total economy, except government and non-profit enterprises. The most comprehensive measure is called Output per Hour in the Private Business Economy. BLS publishes separate productivity data for manufacturing, farms and non-financial corporations. Measures are published yearly for 122 selected industries, but no productivity data are published for individual corporations. Also available are BLS data showing the growth in manufacturing productivity in other industrialized countries.

The total measure of productivity does not include government because government workers primarily provide services, and the output of services is difficult to measure. The rapidly growing health care industry is an example of the problem of measuring the output of services. Doctors and health care employees have been aided by new medicines, equipment, and knowledge which help prevent illness and make treatments of patients more effective. The number of cured patients and the improvement in the health of the community rather than the number of patients treated would be a better measure of productivity of health care. Productivity Since 1950

Productivity growth in the 1970s was slower overall than in the previous two decades although manufacturing productivity growth did hold up. The slower growth rate led to a good deal of discussion as to its causes.

Manufacturing productivity has showed surprising strength in the 1970s despite the unfavorable economic conditions. For all the 1970s, manufacturing productivity rose an average of 2.5 percent per year, compared to 2.0 percent in the 1950s and 2.8 percent in the 1960s.

For the early 1980s, productivity continued to grow very slowly because of the recession, but picked up substantially in 1983 as output increased. Productivity for the nonfarm business sector grew an average of only 1 percent from 1980-82, but registered 3.5 percent growth in 1983 accompanying a 5.0 percent rise in output. Nonfarm productivity showed no increase in the third quarter of 1984 as the growth in output fell sharply.

Nonmanufacturing productivity has continued to show weakness in the 1980s. While manufacturing productivity grew 4.3 percent in 1983, nonmanufacturing posted only a 1.6 percent gain. The diversity of productivity growth rates by economic sector and by industry suggests that researchers should look further than the overall numbers to see why productivity is growing at a healthy pace in some industries but is weak in others. Productivity growth from 1962 to 1982 ranged from an average of 4.7 percent a year in communications to 2.6 percent in manufacturing and finance and 1.1 percent in the services.

There is also diversity within manufacturing. In manufacturing for the same 20-year period, productivity growth registered a 6.2 percent average yearly increase in hosiery, 5.2 percent in synthetic fibers, 4.6 percent in milk, and 4.5 percent for radio and TV sets. Lower figures are found in primary aluminum at 1.1 percent, machine tools with no increase, and footwear, which registered an average decline of 0.2 percent per year.

Some experts have cited special factors in utilities, mining, transportation and retail trade that have reduced the contribution of these sectors to productivity growth. The unique problems of these sectors indicate that analysts should take a closer look at productivity on a sector-by-sector basis.

Productivity growth in utilities was substantial until the energy problems and recession set in during the early 1970s, reducing the growth of energy production. As energy prices rose and demand for energy slowed, many new plants were canceled and unused capacity increased.

Transportation productivity in the 1950s and 1960s was aided by such factors as the construction of the interstate highway system. As the highway system neared completion in the 1970s, its contribution to productivity gains in transportation was reduced.

According to a study by Lester Thurow, 80 percent of the slower productivity growth in mining is due to reduced productivity in oil exploration as the resource base has declined. The extended hours in retail trade are a factor in the slow growth of productivity in this sector. Longer business hours mean more labor time and added convenience to customers, but may have little or no effect on the amount of goods purchased, meaning lower productivity. Shift to Services

The rapid growth of jobs in services and the decline in manufacturing's share of jobs is often cited by analysts as contributing to slower productivity growth in the private business economy. This negative effect results from the slower productivity growth and lower level of productivity in services. For example, in 1983 the value of production by manufacturing workers averaged $22.50 an hour compared to $13.50 an hour for workers in the service sector. New job holders and workers losing their jobs in manufacturing are taking lower-paying, lower-productivity jobs. The growth in these sectors and the decline in manufacturing mean that overall productivity growth has been slower than if manufacturing had maintained its share of employment. The lower level of productivity in services is in part due to undervaluation of service output rather than an actual measure of the contribution of this sector to total output. The measure of productivity levels in service industries depends in large part on wages, which generally are lower in the services. Problems Measuring Productivity

Problems in measuring productivity also cause the figures to show slower growth. Measurement is much more difficult during inflationary periods when adjustments must be made for price increases.

Construction productivity measurement is based on very poor price devices called "input" price indexes which are supposed to correct for inflation but which substantially understate the total value of construction and therefore do not give an appropriate output series for productivity measurement. Productivity data for services including finance, insurance and real estate, and retail trade are based on gross dollar receipts which do not fully count physical output increases when output goes up faster than prices.

In analyzing productivity, most studies have looked at the effect of such factors as regulation, capital investment, the increased number of women and teenagers in the workforce, and the work ethic. Coping with Regulations

Regulations in the 1970s required business to provide safer workplaces, to be more responsive to customer complaints, to reduce pollution of the air and water, and dispose of wastes in a safe manner. These regulations have been credited with major improvements in air and water quality, public safety, and addressing consumer demands for good quality products.

Fortunately, much evidence indicates that these improvements came with a minimal reduction in business efficiency and productivity, and expenditures to comply with pollution control regulations were basically made in addition to other investments. BLS estimated that investment spending on pollution control equipment reduced productivity growth by only one-tenth of 1 percent per year.

When environmental legislation was first passed in the early 1970s, the law required business to bring existing plants up to standards as well as to equip new plants with pollution control equipment. By the late 1970s, as existing plants caught up to standards, the burden of spending on pollution control was substantially less and continue to be substantially lower in the 1980s.

The makeup of the American workforce has changed since World War II to the point that women now hold about 44 percent of all U.S. jobs, compared with only 29 percent in 1950. Women most commonly hold clerical jobs, and 88 percent hold white-collar or service jobs. Twelve percent hold blue-collar jobs in various crafts and as machine operators, drivers and laborers. There is no evidence that women are less productive in the jobs they hold than men. Studies asserting that women are less productive are based on the assumption that their lower pay indicates lower productivity. The lower pay, rather, is a reflection of the generally lower pay levels of service jobs and of the widespread discrimination against women, not an indication of lower productivity. Young Workers

Productivity of teenagers and young adults can be raised by training programs to give them better skills and employment opportunities, and this is particularly important when the number of teenage and young adult jobseekers is growing rapidly. Although the number of American teenagers and young adults grew sharply in the 1970s, the growth in the proportion of teenagers in the labor force in the 1970s was a little less than in the 1960s.

The number of teenagers in the labor force began to decline in 1979. In 1983 there were 8.1 million teenagers in the labor force compared to 9.7 million in 1978. The number of young adults aged 20-24 began to drop in 1982 and 1983. The impact of teenagers on the labor force will be substantially less in the 1980s.

American workers have a strong "work ethic." They want to be productive and to produce good quality products. Much of their identity and self-respect comes from the jobs they do. The data on industry productivity do not indicate any lessening of the work ethic. In some industries productivity rose more than 4 percent per year in the 1970s. These include air transportation, major household appliances, soft drinks, milk, corn milling, hosiery, and synthetic fibers. For manufacturing as a whole, the average yearly increase was 2.5 percent. The workers in high-productivity industries are no different than those in low-productivity industries. The Role of Savings

Savings and capital availability have been ample to provide investment funds, although the opportunities for investment along with growing consumer borrowing, speculative lending, and foreign lending put heavy demands on credit markets. The fierce competition for credit between those who would use the credit for job-creating investment and those borrowing for other purposes has led the AFL-CIO to recommend credit policies that favor job-creating investment.

Many experts have expressed the concern that savings rates in the United States are not high enough, pointing to higher saving rates in competing countries. The justification for the Reagan Administration's 1981 tax cut that gave much more to the wealthy than to low- and moderate-income taxpayers rested largely on the argument that tax cuts to the wealthy would increase saving and increase the pool of funds available for investment.

More than half of the 1981 tax cut went to business and the wealthiest 10 percent of the population. For example, a family earning $200,000 per year received a tax cut of $9,658, while a family earning $20,000 received a tax cut of only $544.

The tax cuts failed to increase saving. The personal savings rate in the first nine months of 1984 averaged 6 percent of personal income compared to 6.1 percent in the same period of 1980, the year before the tax cut took place. Gross saving, including business and government saving, declined to 14.9 percent of GNP in the first nine months of 1984 compared to 15.5 percent in the same period of 1980. The decline in the gross savings rate was due to the large increase in the federal government budget deficit.

Whatever the cause of lower U.S. savings rates, tax cuts to the wealthy are not a solution, and a reversal of those tax cuts would be in the interest of equity and provide more consumer purchasing power to low- and moderate-income families.

A better understanding of productivity growth can help in the formulation of policies to improve the nation's productivity. A major step forward in adapting to the new economic circumstances would be the adoption of a coordinated industrial policy. Consideration must be given to the dependence of productivity growth on a growing, healthy economy which has full employment and full utilization of capacity. Balanced economic growth, with expanding sales and full employment, must accompany rising productivity. Economic policy must also recognize the importance of a broader distribution of the potential benefits from rising productivity.

COPYRIGHT 1984 AFL-CIO
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