The Wall Street Journal has a compact article today that review the state of productivity growth in the US. It hasn’t been so hot since the crisis and continues to be lousy. Economists have been hand-wringing over this situation for some time and the Journal dutifully echoes their concern.
As we’ll discuss, my pet view is that some factor that I believe has been contributing to flagging productivity growth has been ignored: that two management fads are meaningful contributors to lousy productivity growth. First, that of treating employees as disposable, which results in more hiring and firing, may appear to costs but winds up being a net negative by reducing employee motivation and increasing the managerial time spent on personnel matters, to the detriment of focusing on customers, improving operations, and keeping an eye on competitors. Second, the high-surveillance, tangible output fixated approach that some companies employ to manage employees can be and I suspect often is also counterproductive. I hope readers will give me input form work environment on these theories.
We’ll start with the Journal for an overview:
U.S. worker productivity picked up modestly in the second quarter but showed little sign of breaking out of the sluggish trend that has prevailed for more than a decade, holding back economic growth and living standards….
Nonfarm business-sector productivity, a measure of the goods and services produced per hour worked by individuals, rose at a 0.9% seasonally adjusted annual rate in the second quarter compared with the first three months of 2017, up from a 0.1% growth pace in the first quarter.
Compared with a year earlier, which is how economists often look at the longer-term trend, productivity was up 1.2% in the second quarter. That was a pickup from last year, when productivity posted its first calendar-year decline since 1982. It also matched the average pace since 2007, but remained well below the post-World War II average of 2.1% annual growth….
In the U.S., productivity growth was slowing before the recession began in December 2007 and has been historically weak throughout the recovery that began in mid-2009. That likely restrained wage growth and overall growth in economic activity.
“If labor productivity grows an average of 2% per year, average living standards for our children’s generation will be twice what we experienced,” Federal Reserve Vice Chairman Stanley Fischer said in a July speech. “If labor productivity grows an average of 1% per year, the difference is dramatic: Living standards will take two generations to double.”
Commonly Mentioned Reasons for Flagging Productivity Growth
This list isn’t meant to be exhaustive….
Short-termism and low investment. The two are sometimes treated separately but are related phenomena. Your humble blogger first wrote about corporate short-termism in 2005 in the Conference Board Review. We described how it had gone so far that public companies were shrinking, meaning liquidating on an extremely attenuated timeframe. We returned to this theme in 2010 in the New York Times, in a piece co-authored by Rob Parenteau, that this pattern was operating in much of the world ex China. From our draft:
Unbeknownst to most commentators, corporations in the US and many advanced economies have been underinvesting for some time.
The normal state of affairs is for households to save for large purchases, retirement and emergencies, and for businesses to tap those savings via borrowings or equity investments to help fund the expansion of their businesses.
But many economies have abandoned that pattern. For instance, IMF and World Bank studies found a reduced reinvestment rate of profits in many Asian nations following the 1998 crisis. Similarly, a 2005 JPMorgan report noted with concern that since 2002, US corporations on average ran a net financial surplus of 1.7 percent of GDP, which contrasted with an average deficit of 1.2 percent of GDP for the preceding forty years. Companies as a whole historically ran fiscal surpluses, meaning in aggregate they saved rather than expanded, in economic downturns, not expansion phases.
The big culprit in America is that public companies are obsessed with quarterly earnings. Investing in future growth often reduces profits short term. The enterprise has to spend money, say on additional staff or extra marketing, before any new revenues come in the door. And for bolder initiatives like developing new products, the up front costs can be considerable (marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors). Thus a fall in business investment short circuits a major driver of growth in capitalist economies.
Companies, while claiming they maximize shareholder value, increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in financial speculation. They turn their backs on the traditional role of a capitalist – to find and exploit profitable opportunities to expand his activities
Needless to say, capital spending hasn’t picked up even though corporate profits are at record levels compared to GDP. Instead, buybacks proceed at a torrid pace.
Dearth of technology breakthroughs. Notice that Silicon Valley’s current Big Thing is apps? Or how about Juiceroo, which created a $400 WiFi enabled juicer to process prepackaged single servings of fruits and veggies. Turns out squeezing the baggies with your bare hands worked just as well.
Needless to say, virtually all hotly hypes “innovations” these days are trivial. Yet a lot of what passes for talent is trying to come up with bezzle-heavy new businesses, as opposed to working on a cure for cancer.
One defense of the frantic chasing of new “business models” that don’t amount to much is the lack of the development and implementation of a foundational technology, like electricity in the teens and twenties, mass communications (telephones, radio and then television), and of course, computers and later PCs (However, as some economists have noted, the Internet doesn’t seem to have contributed to measured productivity gains. Perhaps all of efficiency gained by hyperconnectedness and the ability to find and send information rapidly has been offset fully by people being distracted by being able to chat and argue more, as well as screwing off more efficiently by watching cat videos on YouTube?).
Mariana Mazzucato, the author of The Entrepreneurial State, contends that a big culprit is how government-funded R&D has been cut since the Reagan era. She shows that government-backed R&D, often done in connection with major universities, has been responsible for far more in the way of breakthroughs that have underpinned big commercial successes than most people realize. One of her examples is that the IPhone depends on twelve core technologies, all government developed. More generally, she argues that only the government is able to take the risk and commit the resources necessary to do basic research.
Lack of infrastructure spending. Silicon Valley has been complaining for some time that the America’s lousy broadband is hurting the development of new tech and new businesses. More generally, having good infrastructure is seen as critical to efficient commerce. Although the costs are hard to measure, think of the knock-on effects when undermaintained infrastructure leads to unnecessary floods (Katrina, due to failure to fix levees despite warnings) or imposes ongoing costs (bad roads or the failure to invest in public transport leading to longer-than-necessary commute times, which lead to tired, cranky, and less productive employees).
Labor cost squeezing deterring investment in labor-saving technologies and approaches. Even though China is now investing more and more in advanced and highly automated factories, that is partly the result of having as a national priority increasing the value added in domestic manufacturing. Plenty of operations in the Pearl River area have a high manual labor content. Similarly, even though the media correctly points out that garment workers in Bangladesh are threatened by greater use of robots, low wages in and of themselves deter investment in lowering labor content precisely because labor is cheap. And it’s also flexible. You can’t fire your pricey robot.
Conversely, the Financial Times pointed out prior to a “steep” UK minimum wage increase in 2016 to a “national living wage”, that the expected effect was an increase in productivity and an increase in unemployment. Yet unemployment has continued to fall in the UK. It’s hard to parse out productivity effects, since Brexit allegedly has led the demon uncertainty to rear its ugly head, and more and more businesses have been reported to be putting investments on hold. Even so, UK productivity hit an all time high in the fourth quarter of 2016.
Bad Management as a Culprit
Note that some of the explanations above are at least in part “bad management” theories. Rampant short-termism is the result of the combination of bad incentives and bad behavior. Too many corporate executives give greater priority to lining their own pockets than building businesses that are both profitable and durable. How many CEOs have been willing to do what the founders of Costco, and their successor, Craig Jelinek, have done, and keep paying workers more than competitors do despite ongoing Wall Street pressure to cut pay and get a quick earnings pop? Costco understands that paying workers better is good business by virtue of lowering turnover, having happier workers (which means better interactions with customers) and lower theft (“inventory shrinkage”). And the affluent customers who frequent Costco feel better about getting WalMart-level deals without WalMart-type labor exploitation.
We think two management fetishes are hurting productivity.
Treating workers as disposable. When I was a kid, if you changed jobs any time sooner than eight to ten year with a company, you were regarded skeptically as either having been a poor performer or an opportunist. Now the average job tenure is just a bit over four years. Moreover, many employees don’t have steady work. It’s become common for retail stores to expect workers to be on call. Many chain restaurants like McDonalds no longer give many workers in the restaurants regular schedules, changing not just the times when they want them in but also the total hours week to week.
This pattern of many workers having a weak relationship to their employer, which was originally created by employers but is now mirrored in employees having their eyes on the door, isn’t healthy for either party.
Higher employee turnover and/or frequent schedule changes means managers are spending more time than in the past making sure there are enough hands on deck. That means more time, for instance, spent in recruiting and screening new hires. This takes supervisor time, which is more costly than employee time, and also diverts supervisor attention from things that are critical to competitiveness, like keeping customers happy. And the vogue for trying to hire worker who have done the exactly the same job elsewhere also increases the effort and therefore senior person time expenditure in finding the right person. Plus the idea that these narrowly-speced hires “hit the ground running” is exaggerated. Every company has its idiosyncracies and a new employee has to master them.
So in effect, this model of low company attachment to its workers is yet another transfer from low-level employees to better paid managers, with the benefits to the enterprise looking to be exaggerated.
Other side effect of this practice include:
Better workers will the first to go, and will go even sooner than if the business were more loyal to them
Employees will lack motivation to put themselves out
Unstable work settings hurt customer service. I have a choice even in my ‘hood of coffee shops and drugstores, both by chain and store within that chain. My preferred drugstore is a bit dreary Rite Aid over the better kept Duane Reades and the CVS because I know the employees. Even though they are slow-moving, they are decent folks. Similarly, since my favorite coffee shop closed, and another independent coffee shop proved to be pricey (OK if it was at least comparable to a Starbucks), snooty, slow to serve coffee, plus the coffee wasn’t even so hot, I’ve wound up at Starbucks by default. Of the three stores near me, two are pretty efficient plus the staff seems chipper and many recognize me (they pull my drink before I place my order), while the third is regularly dirty and service is slow even when there is hardly anyone there. I go out of my way to avoid that one. And I’ve also seen fewer of the same baristas in that storefront than the two others.
Micromanaging of employees becoming counterproductive. More and more companies are using technology to track employee behavior intensively and then subject them to output standards based on that. For instance, USPS employees must scan the bar codes within each mailbox to show when they made their deliveries.
The problem with this level of “management by metrics” include:
Demotivating workers. No one is likely to go out of their way, particularly if their job tasks are highly regimented. They might be criticized for taking time off to do something that seems like an obvious good thing to do, like straightening out shelves on the way from a break, as opposed to only when the schedule says to do so, or trying to prevent shoplifting (even if they see it, why bother?)
By contrast, employees in Japanese companies contribute to productivity through a process called kaizen which Westerners style as “continuous improvement”. They also depict the kaizen as a spontaneous bottoms-up activity, when in my experience, it is anything but. Sections (work groups) are expected to come up with kaizen proposals during a set period annually. They do it because management says so, but also because they see their company as a community (at Sumitomo, all the Japanese, and yours truly following them, called it “our bank”).
Impairing customer service and workplace cooperation. Highly regimented employees are not likely to be cheerful. While it’s hard to measure the cost, cool and distant interpersonal relations can readily contribute to unproductive friction between work groups and suboptimal customer relations.
Suboptimal results by focusing on what can be measured readily as opposed to other factors that may be more important. The fixation on quantification and managing by metrics can lead to managers undervaluing worker/business activities that aren’t readily or reliably quantified. That may show up not in the “How much did those workers get done” side of the productivity ledger, but on the “How many customers showed up and how much did they spend” side of the equation.
Since productivity is a complex phenomenon, it’s pretty much guaranteed that multiple factors have contributed to the slowdown. Nevertheless, virtually all of the discussions of this trend have a remarkable lack of agency, as if executives and supervisers have nothing to do with it. Needless to say, even if my guesses above are off base, the idea of a productivity slackoff as some sort of managerial virgin birth is a convenient fiction.