Flagging Productivity Growth – How Much Is Due to Bad Management?

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.

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93 comments

  1. PlutoniumKun

    A pet theory of mine is that the drop in productivity seems to have coincided with the rise in popularity of the MBA. Having had the misfortune to work under many MBA qualified managers (in addition to many who did things the old fashioned way, having learned through the job), I’m quite convinced they are a major contributor (apologies in advance to MBA holders out there). I’ve found a striking theme among MBAers is that when presenting ‘new’ structures and techniques, they act as implementers, not critical thinkers. Many is the time that myself and other members of the awkward squad put up our hands and say ‘can you provide any objective evidence that this will enhance outputs?’ and find ourselves just blanked out.

    With reference to Yves theory about short termism, if there is a core example of this it can be found in infrastructure engineering. Its long been considered one of the ‘mysteries’ as to why new railways (to take one example) seem to cost so much more in the US and UK than in Europe and Asia. Anyone who has worked in the industry knows the answer. In Europe and Asia infrastructure tends to be implemented in long term rolling programmes using the same set of contractors. This allows the contractors (and the government design/management agencies), to keep in place permanent workers, who gradually over time become better and better at what they do. In contrast, the ‘lowest priced contractor’ mentality means that each project is considered a discrete unit – a team has to be put together once the contract is won, they carry out the work, and then, having learned on the job, the team is then disbanded and sent to the four winds. The process repeats itself ad infinitum. It is incredibly wasteful. And yet, it is considered ‘good practice’ by economists.

    Reply
    1. Yves Smith Post author

      Yes, this is a simpler explanation and for the most part I don’t disagree.

      However, back in the stone ages when I was getting my MBA, 40% of the class had undergraduate engineering degrees and most of them had worked for manufacturers. Now the people who go to B-School are much more likely to have been economics majors and worked in finance or something tech-ish.

      I think that makes a huge difference in the caliber of managers. Engineers deal with physical realities. If you have a part missing from a washing machine, it won’t work. By contrast, MBAs and the lawyers who too often also are CEOs (you see this pervasively in pharma cos) come from a background of being symbol manipulators (dealing with spreadsheets or contracts rather than stuff like managing delivery routes) and so they really seem to believe that if they can make it look good on paper, they can somehow make it work in the real world too.

      There were also way fewer MBA programs that were considered to be any good when I was a kid, so that also was a limiting factor. There are now tons more people with MBA training, and I am sure it has become more neoliberal and finance oriented in terms of a lot of the underlying thinking too.

      Reply
      1. Mark Gisleson

        Writing resumes [1988-04], I concur on MBAs. The fresher the degree and the younger the client, the more they prided themselves on being disruptive (change makers). But then I edited some vanity press CEO bios. Talk about living in your own world!

        In college I wrote a paper on slavery systems in the Americas, and the CEOs I worked with were like plantation owners. Their employees/slaves LOVED them!

        But both groups shared one common failing: short-term thinking. Regular clients fleeing from bad management primarily resented short-term thinking that sabotaged long-range goals, narcissistic bosses/nepotism/cronyism, and bullshit change.

        Reply
      2. PlutoniumKun

        Thanks Yves, I was being a little tongue in cheek about MBAers (I’ve several in my family), but I do think that there is something in the course – or at least the lower graded ‘cram’ MBA’s, which results in management with an obsession with quantatitive rather than qualatitive outputs. I do agree (from those I know) that managers with a solid engineering/technical background tend to be much better, even when not managing in their own field. Mind you, I also know several very talented engineers/scientists who have refused promotions to senior management level precisely because they found the mindset of the professional manager unbearable, they just couldn’t bring themselves to be part of that environment.

        Reply
        1. DH

          Over the years, I have turned down a couple of opportunities to be “promoted” because it would have meant moving into an “overhead” management position instead of being in a line production role. In our business, people are largely billed to clients by the hour, so being line production means you are revenue while being overhead means you are a cost.

          Overhead grows per Parkinson’s Law http://www.economist.com/node/14116121 so every 3-5 years, overhead gets slashed massively and indiscriminately. So if you are overhead, you have about a 50% or smaller chance of surviving the next round of layoffs, whereas line production people have 90%+ chance of surviving because they are revenue which is what the banks etc. are looking for. The pay isn’t much higher for the overhead managers, so the risk-reward is pretty bad. We have line production engineers who have been with the firm for 25+ years, but very few overhead managers have been here that long.

          One of the reasons that the overhead managers don’t survive is that they end up having to agree to really stupid metrics (a la Wells Fargo “8 is great” new account requirements) that are not based on any reality-based model. So all of these people end up running around holding lots of meetings regarding fantasies, but ignoring real day-to-day operational improvements that could actually make a difference. I worked for one company that was firing its branch managers based on monthly numbers. When I analyzed the numbers, I realized that they were random as monthly profits did not correlate with revenue or billable hours because of extraneous accounting things, although the did on a quarterly basis, but that was not how they were analyzed and used. Therefore, those firing decisions were essentially based on rolls of the dice – I turned down that “promotion”.

          Reply
      3. DH

        I read the memos that get sent to us regarding re-organizations, etc.. If I recognize lots of business jargon that you see articles about in HBR, WSJ, Forbes, Fortune, etc. then it means that re-organization will never get off the ground, fail and vanish from sight within four months because it is being driven by fad concepts, often from a consultant with lots of MBAs who don’t actually understand the business and what it takes to implement the changes.

        If the memo are written in plain English with real milestones laid out and rational reasons for things, then those changes are much more likely to occur and have at least a modicum of success.

        Reply
      4. Tomonthebeach

        As somebody who now-n-then has had the responsibility for diagnosing sick organizations, I would say that Yves point is well made. I would just add that leadership and management skills are too often conflated. One cannot achieve a goal without a sound management strategy that will bring designs, materials, and skilled workers together at the right points in time. However, if you cannot instill workforce buyin to that management plan, it is not likely to be implemented effectively.

        Waaay back in 1987, my colleague, Professor Ben Schneider (emeritus at U of Md), published a paper in Personnel Psychology with a title that nicely summarizes an important point: “The People Make the Place.

        Reply
      5. Dirk77

        Well, come the revolution, MBAs get my vote as the group most likely to be first with their backs against the wall. But then they live such reality-free lives already I’m not sure they’d notice. Perhaps their consciousness will transcend to some powerpoint dimension where they can disrupt for eternity.

        Reply
    2. Left in Wisconsin

      In contrast, the ‘lowest priced contractor’ mentality means that each project is considered a discrete unit – a team has to be put together once the contract is won, they carry out the work, and then, having learned on the job, the team is then disbanded and sent to the four winds. The process repeats itself ad infinitum. It is incredibly wasteful. And yet, it is considered ‘good practice’ by economists.

      Another example of economic absurdity in action. Somehow always getting the lowest price ends up costing more! Doh!

      Reply
      1. Procopius

        I remember when I was a kid, my grandmother gave me a book of humor from around the turn of the 20th Century. Lots of Irish and Polish “jokes.” Anyway one of the short essays argued that the poor always pay a lot more than the rich, because the rich can afford to buy high quality stuff that lasts, whereas the poor are limited to buying the low-priced crap that falls apart in a couple of months and then they have to buy a replacement. I think that still is how the world works. By the way, I notice that Thailand, which is still quite poor compared to the “advanced” countries, still has repairmen for all kinds of small appliances. Even shoe repair.

        Reply
    1. Moneta

      At the macro level, these productivity measures are of dubious value as producing goods and services that should not exist in the first place empoverishes us over time.

      Reply
      1. craazyman

        What goods and services you’re referring to and who decides if they shoud exist?

        2% isn’t what it used to be.

        Back in the old days the economy was, say, 100 units big. So 2% growth meant two units/year. Now the economy is, like, 1000 units big. So 2% growth is twenty units per year. That’s 10 times as many units per year! And consider the radius of the earth hasn’t changed! So you’re producing 10 times as many units on the same earth just to stay at 2%.

        Now consider the reverse. You start out with an earth that’s 100 units big, and then you dig and excavate at 2%. After a few years, you’ve used up half of it. After a few more years, you’ve used up most of it. So you start at 2/units per year but after a while 2% per year doesn’t mean as much as it used to. Consider that the economy has been around a long time – probably hundreds of years to be honest.

        So you’ve got these two problems — its harder to grow at 2% and more and more of the earth has gotten dug up, which means even 2% itself is getting smaller.

        If you add the MBAs and the obscene executive compensation, toady boards of directors, cynically dehumanizing corporate cultures, assinine HR policies, the corrosive careerism of spineless “team players”, backstabbing hacks as co-workers and the generally soul-less sewer of conflict and contempt called “the workplace’ — it’s really really hard to grow the economy!

        Reply
        1. Moneta

          Exactly. Here in Canada, now that we’re rebuilding bridges and highways and creating huge congestion everywhere, how could we possibly be more productive?

          And even if we make stuff faster, is it even going to last? Are these bridges going to last 1000 years like the old ones in Europe or 50 years?

          Can we even measure this?

          Reply
          1. craazyman

            It is quite ambiguous isn’t it — the thing that’s being measured.

            I don’t think it can be measured with any objective finality. I came to the realization a while back that any particular given set of social and economic relations could be measured within a variety of different cultural reference frames and be deemed to be either 1) growth, 2) recession, 3) anarchy, or 4) some kind of cultural disorientation so severe that a new category of being would be needed to reference it.

            Imagine measuring a plains Indian tribe’s economic life or a Siberian villiage in the 1300s using our GDP reference frame. and even more ludicrously, dropping them into our cultural reality with our technology and habits of life and economic system.

            The measurement system itself is some extrusion of the culture, which is in turn a construction made out of conflict, cooperation, opposition, vastly differing goals, needs, points of view among multitudes of people. There is no common objective reference frame even there (of course that’s why there’s politics).

            But they make one up and call it “the economy” — which is a work of fiction. And then they say that work of fiction grows by 1.9%???? Or declines by 2.3%. Really? They sound to me like they’re sort of nuts.

            Reply
  2. Ed Jones

    The argument is correct. Management is driven by financial people not operations and quality people. Entire well tried paradigms of cost improvement that take advantage of the skill of all people are no longer being utilized in industries.

    I think an equally important problem is the loss of 2,000,000 manufacturing jobs to China since 2000. —- See Autor at MIT. 1. Manufacturing has a high economic multiplier and hence has more leverage in the GDP calculation than service jobs. The GDP has lost a lot of vigor. 2. The jobs that went to China were the most “inefficient” and utilized a lot of labor. In the factory we always say that you cannot cut cost on work that you do not have. That is the situation here not in a factory but on a macro GDP level. The high labor jobs that we lost to China will eventually become automated in China so that the productivity growth is being enjoyed by China. The highly efficient automated jobs that remained in the US since 2000 are already pretty far down their productivity improvement curve.

    Reply
    1. Procopius

      I remember comments to this effect about the auto industry in Detroit, well, really it was visible in all industries back in the ’50s. There was a clear shift in CEO backgrounds, from the production side to the financial/marketing side. It was quite extraordinary when Robert McNamara was hired as CEO of Ford Motors. Guys like “Engine Charlie” Wilson were no longer being appointed.

      Reply
  3. funemployed

    Re micromanaging, for those who are interested, I can’t recommend any book more highly than Talking About Machines: An Ethnography of a Modern Job, by Julian Orr.

    For Orr, the problem goes much deeper than employee mood, motivation, and commitment to quality. She focuses on processes information flow and top-down proceduralization, and convincingly shows that managers who devalue experience and narrative and fail to pay as much attention to “bottom-up” information flows as “top-down” information flows when making managerial decisions make doing quality work and accessing and utilizing information much more difficult, no matter how competent and motivated the workers are.

    Reply
    1. Yves Smith Post author

      Yes, I completely missed including the issue of information loss, and it’s fundamental. Revolving door employees and/or very tight control of their work presupposes that they don’t know much/anything of value, when they are the ones on the front lines. It greatly exacerbates the tendency of the people on the top not to hear of critical things by virtue of mangers wanting to pass only good news up the chain unless they really have to admit otherwise.

      One of the reasons consultants will always have work is that there always winds up being a need when a company isn’t doing very well for an outsider to come in and mine information, including taking to the troops in key functions. Inevitably you find they have a very good diagnosis of much if not all of the problems. Even though the cliche about this sort of thing is that a consultant takes your watch and tells you the time, the more accurate rendering of that bromide is that the client took his watch off and the consultant finds it and reads it and if the client is at all capable, he might wear it at least some of the time.

      Reply
      1. DJG

        Not just up/down information flow, but loss of institutional memory. Any company with highly skilled employees has employees who carry a lot of information and experience in their heads. That information never is set down in memos to the boss.

        Reply
        1. DH

          This is going to be a huge issue in the coming decade. Many businesses hired baby boomers in the 70s and 80s. Those baby boomers are retiring. Most companies have not thought about this. They have not positioned people in their 20s and 30s to work with them, so all of that experience and knowledge is walking out the door and leaving nothing behind.

          I am already seeing offices that used to be premier outfits 10-20 years ago, where the staff have now retired and the offices are shadows of their former selves. That means growth needs to be driven elsewhere, not just to grow but to also to replace what these offices offered in the first place..

          Reply
        2. visitor

          Other side effect of this practice include:

          …the loss of organizational knowledge, as you point out.

          Oddly enough, corporations are aware of that, and for the past 30 years or so attempted to compensate for it through “quality management” (ISO 9000, ITIL, you name it), formalization of procedures (PMBOK, etc) and “knowledge management”.

          Decades ago, the first firms to reach CMM level 5 in IT were large Indian subcontractors; at that time, this impressed me. When recruiting Indian personnel and assessing subcontractors I learned why: turnover in Indian companies is sky-high. Those firms just cannot afford to depend on organizational knowledge stored in the heads of their employees.

          Reply
      2. vlade

        This ties to the replacability. In fact, it’s a replacability precondition if assuming rationality. I.e. you can replace instnatly, then whatever is replaced can’t be any better it’s being replaced with..

        Reply
      3. Vedant Desai

        Will you please elaborate on this a little? Because books on management consulting industry (such as “the managnent myth” by Matthew Stewart) gives very different picture of managment consultancy business. As per such books , primary reason why consultants are hired is to serve as bad guys for unpopular decisions of managment. Of course , books are not completely reliable. Hence it will be quite helpful to me if you elaborate a little.

        Reply
        1. lyman alpha blob

          I have a relative who consults for Fortune 500 companies. I asked him once what exactly it was he did that was so valuable, since you’d think once someone got to the CEO level they ought to have some idea how to run a large business and wouldn’t need to hire consultants in the first place.

          He told me he would ask the rank and file employees what problems they were facing and what they thought should be done and then he’d go tell the upper management. Nice work if you can get it.

          Reply
          1. Gordon

            Exactly! As an undergraduate I had a geology professor who had a sideline consultancy for a well-known international mining company that paid for him to go round the world first class twice a year visiting all their exploration sites.

            I asked him what, on a very brief visit to each site (from his account largely spend socializing with the staff), he could possibly add.

            His answer was that the company didn’t have a internal mechanism for transmitting the front-line guys’ knowledge up the line so what he did was ask them their view and write it up for senior management.

            A nice little earner for him but the company no longer exists!

            Reply
        2. Yves Smith Post author

          I didn’t see that at McKinsey. McKinsey was not arms and legs of management. They NY office had about 250 people when I was there, and one could hear most of the gossip. Partners sold work and the work was to solve particularly client problems, not to justify things they wanted to do. You can’t charge big bucks unless you tell them things or give them plans they hadn’t thought of before or at most maybe had but had rejected them for bad reasons.

          The exception is cost-cutting projects, which when I was there no one wanted to work on, plus they tended to be cyclical.

          But now there are cost cutting specialist firms that coin money by taking a % of the savings. Funny how people now want to do this work if they can get big bucks.

          Reply
      4. Left in Wisconsin

        The revolving door is at least as bad at the top management level as it is at the worker bee level. Back when I was in regular contact with the business school profs that worked with executives, I would ask them how long an exec on the top mgt track would spend in one position. The answer then, almost 20 years ago, was 12-24 months. It may well be shorter now. Top management in big cos now hardly ever really knows the product; they just know the financial metrics.

        I think there is a good chance that our collective business management is now dumber than it was 40 years ago. Not that it was great then.

        Reply
    2. DH

      In my engineering field, there is a really interesting paper written in the 1950s by one of the giants in our field on his experiences dealing with clients and management in his career to that point through the 30s, 40, and 50s. I pass it around to people periodically and point out that if we just tweaked it a bit today to toss in some references to computers, faxes, mobile phones, etc. that didn’t exist in the 1950s, it would read as if it was written today. That is how little our actual management practices have changed, despite massive changes in the technologies applied on our projects.

      There has been a ton of psychological and behavioral economics research over the past 50 years that has shown that most of the management paradigms regarding employee motivation and management are BS, but they are largely ignored in industry. I truly believe that the inability of management practices to advance and take real advantage of advances in technology is a 1%-2% hit to our GDP every year. We are stilling living in management practices that don’t realize that Taylorism was disproven decades ago for most modern types of work.

      Reply
      1. Left in Wisconsin

        There is also a whole history of industrial relations and human resources research from the 1940s-1970s that demonstrates the economic value of good employee practices that has been virtually entirely forgotten, written out of management memory.

        Reply
        1. Procopius

          Frederick Winslow Taylor was a genius, and, like many geniuses, somewhat disconnected from reality. In the introduction to Scientific Management, he says something to the effect that the purpose of management is to maximise the benefits of the company’s production for the employees, the management, and the owners. Management soon buried that idea, but they did adopt his time/motion studies and added the concept of speeding up the assembly line.

          Reply
  4. lyman alpha blob

    I think you are on to something.

    Our company had a rather conservative CEO and CFO who had been with the company for decades retire and the new management who stepped up came up with some arbitrary “10% growth year over year for the next 4 years” goal which we haven’t come close to achieving. During the tenure of the new management, we have had extremely high turnover, with many people who had been there for 10 or 20 years being let go as their “skills were no longer a good match”. This has also led many others to quit, not liking the direction the company is taking.

    Meanwhile management had salesforce installed in order to take advantage of its big data capabilities, but they wanted it customized which was a complete failure and wound up hollowing out our IT department. We had to bring in a consultant to fix this debacle, and yesterday at a meeting I heard through the grapevine that a normal company might store say x amount of data in salesforce while we were storing much more than that, maybe 2 or 3x. This was because at management’s behest, people were logging in things like “made phone call no answer” to document every single move they made regarding the clients.

    Our management seems to have bought into the “moar tech = moar groaf” mantra without having any idea why they’re doing so.

    Reply
  5. Democrita

    I can attest to the waste of time spent constantly recruiting. Not even hiring full-timers, but a rotating circus of freelancers needing relentless training and monitoring.

    Also, to the ‘unicorn hire’ phenom: company doesn’t want to pay for 2 people, so seeks one person with 3,4 disparate skill sets–a Drupal expert who knows asset management and botany! We just replaced a hire like that.

    Re: internet’s impact on productivity. It’s not just distracting cat videos, but the greatly expanded quantity of data we must all process every day. The stupefying flood of emails……

    We are drowning in information. It takes a huge chunk of brain capacity to manage it all.

    Reply
    1. DH

      I assume that you are willing to pay the person who knows asset management and botany at least $10/hr, so there should be lots of qualified applicants.

      Reply
      1. Arizona Slim

        Drupal experts are VERY hard to find and are worth whatever they charge. Don’t argue, just pay them.

        Reason: Drupal isn’t the easiest website content management system to deal with. So, if you find someone who know his/her stuff, you hold on for dear life.

        Reply
  6. Steve Ruis

    I tend to agree here, but with regard to “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.” from the original WSJ article: restrained wage growth? What wage growth? Wages haven’t been meaningfully coupled to productivity for decades. This seems to be part of the common disinformation campaign, to pretend things are different from what they really are. Pretend problems are very easy to solve. They can be solved with less effort than it took to create them. Imagine something … now imagine it away. Ta da!

    Reply
    1. Left in Wisconsin

      Right. Even though that “restrained wage growth” has been in evidence for 40 years now, it always has to be a brand new surprise to “economists” because, by definition, higher skills = higher productivity = higher wages. Of course, in real life, not. But then, admitting that would complicate the narrative.

      Reply
      1. Procopius

        Just so. On the charts I’ve seen, the turning point seems to have been about 1974. Certainly a lot of the ideas that later led to “The Washington Consensus” started under Carter. IIRC the Powell Memo was written that year, but the policies seem to have already been put into effect. By the way, Carter was the one who appointed Volcker, who, when he got the opportunity, said privately, “There’s going to be blood on the floor,” as he intended to dismantle labor unions.

        Reply
  7. Steve Ruis

    Okay, could the drop in productivity be at all linked to the fact that there is no benefit to the worker from an increase in productivity (and hasn’t been for quite some time, and hence no incentive? (Remember the management-labor mega deals in the 1960’s in the auto industry that tied compensation to productivity?) That keeping one’s job has become disconnected from anything a worker can latch onto? (I’m asking as I haven’t got a clue.)

    Reply
    1. Marbles

      Employees typically don’t work harder/smarter with raises or stock options or perks or pizza Fridays.

      Management would need to rethink how the work is done with less than enthused employees to get better #s, ime.

      I manipulate symbols for a living, and management would need to reduce my cognitive load on any given task to get better #’s, because I really could care less about these symbols.

      Reply
    2. Ranger Rick

      While there might be some of that (working just hard enough to not be fired) reflected in productivity measurements, any realized gains in productivity have generally been due to the factors provided in the article: technological development, business practice innovation and investment in improved infrastructure.

      I think there may be another reason behind the plateau: there is no demand for increased productivity. Economists may see productivity gains as “pure profit” for the economy, but the fruits of that productivity have to be enjoyed somewhere. I think a good example is the automotive industry, which is currently idling factories worldwide because demand for new vehicles is falling like a rock.

      Reply
      1. cocomaan

        Regarding technological development, I think it’s actually stagnating us more than we know. Legacy systems are albatrosses hanging around the necks of these institutions. Getting them to talk to new systems requires huge outlays of time and treasure.

        Plus, I think old technologies are being misused. I worked in a place where email was the norm. I think it was being misused. Instead of being used for quick communications, complex arguments were written up (and discoverable) over email. That’s not what it should be used for. Face to face meetings are far more productive, to me, than these complex emails. I stopped using email for that reason and instead went old school: walking across the building, or to another building, to talk to someone. The amount of work I’ve done that way is amazing.

        Reply
        1. Arizona Slim

          Preach it, cocomaan!

          I’m writing this from a coworking space, and management sends regular tips on how to make the most out of being here. I can boil them down into something simple like this:

          Don’t stay glued to your chair with headphones welded to your ears. Get up and talk to people. It’s amazing what you’ll learn.

          Case in point: There’s a lady sitting a few seats away from me. She’s in charge of housekeeping for an about-to-be-opened hotel. Have you ever been curious about hotels and how they stay clean? Well, I am. And I intend to ask her how that’s done.

          Reply
  8. Mark

    Those are certainly contributing factors which I saw get worse over time (30 yrs with a large multi-national company).

    Would like to suggest another contributing factor – increasing concentration of many industries in the hands of a small number of ever larger companies. These near monopoly conditions and the pricing power it provides decrease the need and rationale for capital investments that would increase productivity. Makes more sense to use that money to buy back shares, fund M&A etc.

    Reply
  9. Livius Drusus

    The late David M. Gordon discussed the problem of managerial bloat and “mean” managerial style in his 1996 book Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Managerial Downsizing. While published in 1996 I think the book discusses many of the problems mentioned in this blog post, like how America’s draconian management style (Gordon called it the “stick strategy” as opposed to a “carrot strategy”) is actually a burden on the economy.

    For one thing, requiring armies of managers to monitor and discipline your workers is expensive. Interestingly you rarely hear about consumers paying for the cost of managerial bloat like you do when wage increases for non-supervisory workers are brought up. Nor do you hear about expensive managers decreasing the amount of money that might go into investing in more productive technology. I think this reflects the class bias of most journalists who likely come from the same class background as most managers.

    Another issue that you touched on is that heavy-handed management will eventually reduce worker motivation. The best workers will leave and you will be left with a disgruntled workforce that has every reason to try to shirk or steal if they can because you have demotivated them. It is a self-fulfilling prophecy. Americans companies regard American workers as lazy and in need of tough management. The stick strategy is applied and guess what, you end up with a demotivated and angry workforce that hates to work and will be less productive!

    Finally, abusive managerial practices cause workers to regard productivity-enhancing innovations as a threat. However, if your company promotes cooperative labor practices there is likely to be less opposition to capital investment. I don’t have Gordon’s book in front of me but he compares productivity growth in the United States and Canada to countries on the European continent with more cooperative labor relations and the Europeans had stronger productivity growth. This makes sense because if you have a strong union, some job security and some say in how decisions are made you are probably less likely to see capital investment as a threat.

    Much of the current intense fear about automation is probably traceable to American labor relations. Management by fear means that you have little say in how capital investments are implemented and no job security if your position is replaced with a machine. You also don’t share in any productivity gains that might come about from automation. Much of the new technology being brought into the modern workplace seems to revolve around surveillance and punishment instead of actually producing more goods and services.

    My own experience with American workplaces is that many of them are quite primitive except when it comes to surveillance technology which seems to be where a lot of tech investment goes now. That is how you get the dirty, ugly Walmarts that look like something from a developing country except that they have all the latest surveillance gadgets. If things keep going the way they are the United States will look like a high-tech version of a Brazilian favela.

    Reply
  10. SoCal Rhino

    Acceptance of the ideology that corporations are run solely to increase shareholder value, i think. Most of the rest are implemementation details.

    Reply
  11. DJG

    All of the factors mentioned in the article contribute. It was good to read such a comprehensive and astute list.

    Question about R&D and universities. Certainly, the drop in government grants may be a factor. But how much is also the “professionalization” of the university, with scads of mid-level deans and such, overemphasis on student comforts in the form of Olympic-size swimming pools and food courts, and the rise of university P.R. departments and even affinity credit cards? Universities are now power centers, especially the Ivies and their competitors like Stanford, UChicago [™], and MIT. Are they still places that educate and do research?

    Reply
  12. DJG

    A management fad that strikes me as poisonous to productivity is the open office. The HQ of the company I work for has an open office–no telephones on desks, no dividers higher than about 3.5 feet, long hallways of telephone rooms and conference rooms. It is like something out of StarTrek. Or maybe it is the panopticon, where everyone is watching each other. Or the movie Brazil.

    In any case, the destruction of even minimal employee privacy leads to a lot of wandering around. Many of the employees work at home one or two days a week, which may be healthy. Or it may not be: Those of us who have worked at home for years have been forced to develop habits of being productive. When you work at home two days a week, the temptation to multitask and do laundry may be too persuasive.

    Reply
    1. visitor

      I always had the impression that the open office, and even worse, that kind of free stalling when one always has to find a free desk in a limited pool of work-stations first time when coming to work, were actually tricks to reduce real-estate costs — compared to having individual offices.

      Actually, the most productive arrangement I have experienced was an office shared by 3 or 4 people. Allows discussions and common work, but is quiet enough and will not disturb other people not in the close team.

      Reply
  13. Polar Donkey

    I manage a pretty big restaurant. We have around 8 bussers on staff. Mostly kids 16 to 22 years old. Always have same schedule and number of hours. Many of the bussers have worked at McDonald’s. The way they talk about how they are treated by management and customers is terrible. Managers, besides treating employees as disposable, are also verbally/emotionally abusive and schedule kids for 2 or 3 shifts a week. Keep pool of workers large but shifts per worker low. They burn through staff. One of our kids said he worked at a McDonald’s 9 months. By month 3 he was training all the new employees, still made minimum wage though. The only benefit he got from his extra value to the restaurant was he got to pick where he wanted to work. He made fries every day. Best job because no stress and no interacting with customers.
    Had an older busser go to Fedex Hub a couple months ago. Came back to wash dishes. Said Fedex wouldn’t give him more than 18 to 20 hrs a week. 5 nights a week, 3 to 4 hours a shift. I worked in the hub 20 years ago. Pay rate has barely changed. They did that 18hr crap back then too, except at Christmas time when they expect you to be there 40+hrs. Fedex has steadily cut back on training over the years. Heard it has gotten more dangerous working in the hub. Say some nights there are 2 or 3 ambulances called.

    Reply
    1. Louis

      It gets worse than that. While I can’t speak to McDonalds specifically, I do know that many businesses in retail, and probably restaurants as well, use just-in-time scheduling, more commonly known as on-call. What typically happens is that when you have an “on call” shift you have to call-in two hours or so before the shift starts to find out whether you’re needed that day–sometimes you are and sometimes you aren’t. Washington State made this practice illegal within that last year or two but as I know “on call” scheduling is legal in almost every other state.

      During the busy season most workers get all guaranteed shifts, in the somewhat slower season it may be a mixture of “on-call” and guaranteed shifts, and in the real slow season it might only be “on call” shifts. If all you have are “on call” shifts and they don’t use you, you don’t get any hours that week.

      No doubt there will be a chorus of people who react to this with “get an education” but it’s hard, though certainly not impossible, to get another job or go back to school if you don’t know what your hours are going to be.

      Furthermore, just as automation is affecting a lot more than jobs like McDonalds–what most people think of as “white collar” jobs aren’t immune from automation–it may be just a matter of time until the “on-call” contagion spreads to higher-skilled jobs.

      Reply
  14. Tertium Squid

    USPS employees must scan the bar codes within each mailbox to show when they made their deliveries.

    You can tell the deliverers are under huge time pressure. Used to be when there the UPS or Fedex guy came to your house with a package, he would knock on your door and give it to you. If you weren’t home he’d move the garbage can in front of the garage door and put the package behind it.

    Nowadays they just go straight to the garage, no door ring. I’ve come out a couple of instances and surprised them and they look up, “Oh, there you are” like they had actually knocked and we hadn’t answered.

    By just dropping stuff off without knocking, I’m sure more merchandise is stolen.

    Reply
    1. PlutoniumKun

      As an urban cyclists, I can tell exactly which delivery companies put most pressure on drivers, because I can see the brand names as they whoosh 6 inches past my elbow rather than wait 10 seconds for an opportunity to pass me properly and safely.

      Reply
      1. Altandmain

        Is there a list somewhere of who is under immense pressure?

        From my experience, UPS here in Canada seems to be under pressure. The FedEx guys seem to be more laid back. FedEx is however quite expensive compared to Canada Post, especially for imports (brokerage fees are insane).

        Canada Post (our equal to USPS and Royal Mail in the UK) … I’ve had mixed results, but I feel they need to invest in their people. I spoke with our mail delivery person and he is underpaid (they pay less for a rural area and I live in the suburbs). Union negotiations have been tense. I strongly suspect that they are badly underpaid and overworked.

        I wonder what the costs are?

        – Low employee morale has a cost in productivity
        – People will do their job just enough to keep it, but not try to go “above and beyond”
        – Training is not as good as it could be, so employees are not as productive
        – Higher turnover costs
        – Having to reimburse for stolen packages
        – In the case of cyclists, pedestrians, and perhaps other car drivers: they are a danger on the roads!

        I think that they need stronger unions. I know unions are not perfect (heck I used to be in one), but they can help take off these pressures.

        This is an example of what can happen:
        http://www.snopes.com/business/consumer/dominos.asp

        Reply
  15. JimTan

    Yves – well said.

    Another reason for flagging productivity growth could be the recent corporate focus on rent seeking as their primary source of profits. FT Alphaville discussed this idea in their article “On The Rise of Unproductive Entrepreneurs“.

    Their main argument is that “innovation and output doesn’t necessarily languish because of a lack of entrepreneurs willing to take risk. It languishes because entrepreneurs are incentivised to direct their efforts to parasitical ventures based on rent-seeking, monopoly formation or unproductive vanities…….entrepreneurs stop focusing on growing the pie and start focusing on stealing other people’s bit of the pie for themselves”

    Reply
  16. Jesper

    The reward for a productive employee is to be given more work, not more money….. Therefore smart employees do not show productivity enhancing measures to management. Management is aware of this so monitoring is increased, the monitoring is usually a pointless exercise in wasting time and therefore not productivity enhancing – it is actually the opposite.
    Then combine that with meetings upon meetings about productivity…… These meetings rarely have any positive outcomes and are therefore also decreasing productivity.
    And the gaming of poorly set performance measurement targets is often a very good thing for all employees but does nothing good for producitivity

    Shareholder value isn’t the biggest factor, the biggest factor is management value capture. Management will not make themselves redundant and the most noticeable things management can do are:
    -micromanagement. Few can micromanage well enough for it to be productive but if done then management is seen as doing something
    -monitoring. A manager who knows the length of all employees bathroom breaks is seen as being in control of his/her team and that is seen as a good thing….

    Reply
  17. PKMKII

    I know someone who does database work. Few years back, they were doing some freelance work for one of the big toy store chains, assembling the data for a big end of year sales report for the whole company. Thing is, he notices the project is being set up to only be able to be used as a one-time project, when it easily could have been adjusted so it could be used year after year.

    So he brings this up to his supervisor, some young hotshot, and their response was “what do I care? I won’t be here in a year.” Now I don’t know if this attitude was the result of the environment the upper management created at the company, or if it was just his internalized worldview of don’t stay anywhere long, but the result is the same. No one is thinking about building a solid company or division for the long term, it’s all about making themselves look good short for the next job that they’ll only be at a few years, and leave behind the mess for the next poor sap.

    Reply
    1. BruceK

      I agree, but is it ‘next poor sap’ or ‘next lucky hotshot’?

      Is this one of those self-licking ice cream things?

      Reply
    2. Cat Burglar

      You’re onto it: management people change jobs frequently, too. They need shiny resume items to sell themselves upward to their next employer, and what could look better than “Implemented innovative networked digital hands-on program reducing employee toilet paper use creating new profit center.” Implementation is their stock-in-trade. IBGYBG means there is no responsibility beyond crafted short-term metrics. And everybody else on the job gets to live with the accreted innovations.

      Reply
  18. Paid Minion

    In aircraft maintenance, management decisions from the mid 80s on are coming home to roost with a vengeance. Improved productivity? In our business its been regressing for 15 years.

    Formal training was cut back significantly, starting in the 82-86 recession. experienceing budgets cut to zero, as a Bankruptcy avoidance measure. The management soon discovered how much money could be saved, so it didn’t return.

    Thirty years of pay cuts/more work for less pay has made the jobs unattractive. All of those pay cuts were forced on employees to create/maintain “growth”. This has created huge problems with the number and quality of people attracted to and staying in the business.

    The pervasive view of management that you dont have to know anything about doing the job, to manage people performing the job. Add to this the “Diversity is a Universal Good” program, in which case “disadvantaged” people (usually women) with no “wrench turning” experience are fast tracked into management positions over (usually) white males with 15 to 20 years in the business.

    (Sure, dismiss me and my “white male privilege” but the fact of the matter is that companies are losing a lot of guys who have been basically told (by action, not talk) that you will “plateau” after 10 years, at which point its time to move to greener pastures. This, not coincidentally, is about the same time it takes a wrench to get “good”). Sometimes the industry retains that guy. Most of the time he gets hired by people more interested in someone who can do the job.

    The proliferation of military “veterans” in management positions. Upper management loves them. Not so much the recipients of the “floggings will continue until morale improves” peons. Especially when they try to recreate their military organization. Sans the socialist programs that allow that dedication to mission.

    Reply
  19. Antony B

    Apologies if this is a basic question – IANAEconomist – but does the methodology used to calculate productivity take into account changes to how the economy is structured? In other words, could – for example – the UK’s “productivity puzzle” be explained by the fact that the way productivity is calculated fails to take into account the restructuring of the economy that’s taken place over the last 20 years?

    I get that like-for-like measurement tells us something important, but the way that the measure is calculated is the difference between “people are less productive” and “the mix of the economy has changed”.

    Reply
    1. Left in Wisconsin

      Short answer: yes. There are a variety of schemes the productivity data collectors use to try to separate physical productivity from price changes from quality changes from output measured in dollars (think finance and real estate) but it is mostly all a big, hand-waving mess. The only way you can have economy-wide measures of productivity is to decide how you want to compare different businesses/products. There is no one right answer to that (what even is productivity in real estate?, which BTW is one of the most – and in some measures THE MOST – productive sector of our economy) and which answer you choose impacts the measurement pretty substantially.

      It is apparent to everyone except economists that average productivity in manufacturing is way higher than it is in services, and thus exporting a third of our manufacturing since 2000 is likely to negatively affect productivity. But according to trade theory, we are only exporting low productivity jobs to China, and trade theory “proves” that workers who lose their productivity jobs via trade are reallocated to higher productivity sectors. Except they aren’t.

      Reply
      1. Antony B

        So, firstly, thank you for your response.

        Secondly, your first paragraph makes total sense to me, and is what I suspected.

        But your second paragraph – forgive me – I find confusing. It is only obvious to me that productivity in manufacturing is way higher than it is in services if your measure of productivity skews that way. In that case, yes of course offshoring manufacturing jobs, thus causing skilled labourers to become baristas, reduces productivity. But then productivity is just a proxy measure for “ratio of manufacturing jobs to service jobs”. Or is that exactly your point? In which case politicians wringing their hands about productivity’s decline either don’t understand that basic fact, or (more likely?) don’t care as they’re happy with the status quo.

        Reply
        1. Left in Wisconsin

          You make a good point. I glibly switched from meta-comment in para 1 to not-meta-comment in para 2. All conventional measures of productivity show productivity in services generally to be much lower than mfg. The conventional story one always hears is that it takes the same number of musicians to play a Beethoven symphony now as it did when he was writing them.

          As you get at, there are (at least) two issues with productivity in services. One is: how many lattes (or home health care visits) equals a car? Obviously, you can use relative prices in one year as a base, then go from there, noting going forward changes in price and quality in each. (As you can imagine, those measurements are dicey, even when you know what you want to do.) But there is no reason to take any particular base year as “the one,” so economists now prefer chained-indexes, which basically involve updating the base year every year. But, I would argue, it all still ultimately comes down to price, because there is really no other way to compare lattes and home health care visits and cars. There is just a lot of hand-waving and calculus to obscure that point.

          Harry Magdoff, later a well-known Marxist and editor of Monthly Review, was actually the economist in charge of developing the first productivity measures in an NRA project in the late 1930s. He was always adamant that it was impossible to compare productivity across economic sectors and fought against the changes in the way the govt measured productivity in the 50s-70s. He lost.

          Reply
  20. David

    There’s also the simple but fundamental point that in order to be productive you need to have the opportunity to produce. If Shakespeare had had to submit plot outlines, diversity statements and anticipated budgets for all of his plays he would have written fewer of them. In all organizations I’m familiar with, in a number of countries, the time spent by employees on useless administration wished on them by their hierarchies has expanded enormously in the last generation – I would guess by a factor of ten or so. And that time can’t be spent on productive work. And think of the time and effort wasted by the large number of people in an organization who are spending their time looking for a better job, and so not doing the one they’re being paid for. Moreover, most large organizations have moved away from career planning, to internal job application systems, which are enormously expensive in time and resources, and often put the wrong people (or the only people who are available) in a job. In the circumstances, it sometimes surprises me that any work gets done at all.

    Reply
  21. Finnoculo

    Two recent contract positions for me (as a software developer) explain at least part of this picture. The first was at one of the big five banks (its been in the news recently for lots of fraud against its retail customers — hint – hint)… and the job, which was implementing Dodd-Frank and the EU version of same, was entirely run by H1-B visa holders in the tri-state area and the other half of the workers were in some tech city in India. Their development practices were abysmal — no unit or any other kinds of tests — they had developed the core system while pulling many overnights and so got their data model all wrong which led to massive inefficiencies down the road, and a system that was dying on the vine and would likely have to be entirely re-written. Who loses there? Not the Indian devs. I personally have nothing against foreign devs in all honesty. What I have a problem with is poorly design systems written by people who don’t care because they won’t be around for very long. But whose fault is that? Neoliberal economists and managers

    After that fiasco I found a job at a firm that was hiring like crazy. They spent 8 months hiring and then in one huge layoff let go many of those they’d hired during that time. So, many of these devs had just enough time to become useful to the firm before being sacked. Now that’s some seriously wasted productivity.

    I’ve finally landed at a firm that takes its workers and its systems seriously. Its a need in the haystack.

    Developers are not fungible. Neither are most other workers. Institutional knowledge is precious. Middle management should learn to treat it that way or productivity will continue to drop.

    Reply
    1. DH

      Fredrick Brooks wrote the bible on this in 1975: https://en.wikipedia.org/wiki/The_Mythical_Man-Month

      The lessons he wrote up still have not been learned by many managers 42 years later……meanwhile, back to our regular programming on the hypothesis of bad management being at the root of many productivity issues.

      BTW – The Mythical Man-Month is highly applicable to just about any type of engineering design project, not just software. You just need to substitute a few appropriate analogies into where software specific language is used, and it becomes universal.

      Reply
      1. jeremy Grimm

        I too found great wisdom in “The Mythical Man-Month”. Unfortunately I also saw the same mistakes detailed in that book enacted in real-life over and over and over … and over again as I hung on to a series of jobs in software development through some of the most stressful years of my life.

        Reply
    2. JBird

      Developers are not fungible. Neither are most other workers. Institutional knowledge is precious. Middle management should learn to treat it that way or productivity will continue to drop.

      I would not put the blame on middle management. It is the whole ecosystem, including Neo-liberalism, that has been been put in place over the last thirty years.

      It is like blaming gardener for weeding, spraying, and trimming to death a green garden to a few dying trees because that is what they are told to do. Too many think that the more you mess with a garden the better it will be, but Monsantoizing with omnicidal sprays, and modified this, and cultivated that, with a few type of plants, will make a great garden. Which it can do, or a least the appearance of one. A great deal of money is spent to convince people to do so because it is profitable for the purveyors of such for you to buy it. I compare neo-liberalism to this.

      The short term thinking, the worship of credentials over experience, the dismissal of any concerns except what is perceived to be good for immediate profits with cutting back instead of growing anything the main tool, the lack of real thought, of understanding the real world, being spread from somewhere, to think tank, to schools, to businesses, and then to society as a whole.

      Reply
      1. DH

        One of Frederick Brooks key observations was that the best programmers are 5-10 times as productive as the average. I have found that for other knowledge-worker areas as well. Financial people can’t conceive of this, unless they assume it is themselves when negotiating their salaries and bonuses.

        So every employee is viewed as fungible having the same potential production. The result is nobody can figure out why one team is slamming it while another team is struggling to order pizza.

        Reply
  22. JBird

    I could rant for hours on this. Stupid things done to improve productivity, and profits, but don’t.

    I worked for a big department store chain back in the 90s, and when I started it was one of those well staffed department stores that focused on middle class merchandise (I think this part of the problem overall. An ever smaller middle class means all the focus is on cheap crappy service or high end boutiques).

    The company was a bit stodgy, and the pay was iffy, but the benefits, the management, my fellow employees, and the customers were all good, sometimes great. It and the store I worked at, still made a profit

    Over eight to ten years time, starting I think when the senior corporate management was finally retiring, and being replaced with the new blood, everything was cut back. The fat, then the muscle, and finally the bone was hacked out in the name of profit.

    First the store’s back office was cut and eventually eliminated, same with much of the management, then merchandise quality was consistently reduced, the perma-sales, then the unofficial policy of giving the least hours to the highest paid staff (the old ladies, and some men, who knew everything, and could help on any problem) Then the commissions were also regularly reduced until there wasn’t any. Oh, and the clawbacks on returned commissions kept increasing until the “non-returnable merchandise” was clawed back from commissions even after a year’s, or more, time. And the employee’s training was reduced until, guess what? There wasn’t any even for those departments that required weeks, if not months of training to do well.

    Finally, all staff was reduced to a skeleton, except for loss prevention. They kept growing. The management, the staff, the customers all got burnt-out, deskilled, nastier. Of course, a retail store needs employees to sell anything, but they didn’t accept that. I guess that idea didn’t match the metrics although anyone who thinks 2 to 4 employees, one manager, and two in loss prevention for a two story department store, with nine separate departments is good is an idiot. The well educated corporate management thought it was a good idea.

    I could go on, but you get the point. The crapfication of everything, with the corporate management always complaining about the poor, or decreasing, sales and therefore profits being made year after year. Oh, and the announcement by fax that the store was being closed, less than a month after being told that no closings were planned, was a nice touch. We weren’t profitable enough.

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  23. Wisdom Seeker

    Adding two points:

    1) Quality of a team is much more important than price of team members. In lines of work where skill, experience and teamwork matter, you can pay employees more – sometimes double the normal rate – and still make up for the cost with higher productivity from the team as a whole. Because people who know each other and know the system can be far more productive than newbies.

    2) Stan Fischer should be fired for this abuse of economics: “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.

    This is demonstrably not true for two reasons that someone of Fischer’s rank and stature should know by heart. First, “living standard” is not the same as “income” – if you earn twice as much you are not able to live at twice your prior living standard. There’s a law of diminishing returns, not to mention the progressive tax code working against you. Second, and more obviously, productivity growth doesn’t benefit everyone. The past 3 decades’ worth of increased productivity has all accrued to the owners rather than to the workers, who have had stagnant real wages. So why should workers seek increased productivity? They aren’t benefiting from it!

    Reply
    1. JBird

      The past 3 decades’ worth of increased productivity has all accrued to the owners rather than to the workers, who have had stagnant real wages. So why should workers seek increased productivity? They aren’t benefiting from it!

      It does have a bit of “the beatings will improve until morale has improved” feeling doesn’t it?

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      1. DH

        This is one of the reasons I live in upstate NYS. It is cheap, short commutes, nice surrounding countryside – even wine tastings at local wineries are cheap at $3-$5 per tasting. It keeps us totally out of the big-city rat-race with the keeping up with the Jones’s problems. People are baffled why somebody would pay good money for a BMW given our winters and salt use, while people smile if somebody has a summer sports car (that the upper middle class can afford because their house with four car garage costs <$400k).

        So we can save for retirement pretty easily. Almost nobody I know in our middle-class to upper-middle class setting is stressed about retirement, because costs are relatively low and they have been saving. the big question is whether or not they can retire early instead of questioning if they can retire at all.

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  24. ChrisPacific

    A corollary of the disposable worker theory is that because companies don’t see themselves as investing in the careers of employees, they are much less willing to train them than they were. Managers want the perfect person for the job, and if they don’t exist then they throw up their hands and say it’s impossible to find staff. Meanwhile there might be 10 people out there who have all the necessary skills and qualifications in the relevant field, lacking only experience in industry-specific or proprietary technologies that they could probably pick up in a few months with the right support, and they can’t get an interview.

    I am convinced that a lot of this stems from our current predatory model of capitalism and the kid glove approach taken by government and regulators since the GFC (what Bill Black calls the “criminogenic environment”). There are still decent managers out there who believe in investing in training their people and supporting their careers, but I suspect they are also the kind of people who would balk at engaging in criminal business practices and fraud simply because they could count on corrupt government and regulators to look the other way or (at worst) impose a slap on the wrist fine. In today’s business environment, that puts them at a big disadvantage.

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  25. Nell

    Interesting – and depressing – the management at the University has adopted many of the bad practices listed above in efforts to improve the productivity of academics. Productivity in this sense is number of high impact articles published, amount of grant income, and measures of student satisfaction. As you can imagine, it is not working very well and morale amongst academics is very poor. The real problem of course is that due to policy changes over the years in the UK, academics are over-worked and under-resourced. This is having a knock on effect on their productivity (who’d a’ thunk?). So managers wade in trying to squeeze more out of the academics whilst threatening them with ‘capability’ procedures and dismissal.

    Reply
    1. JBird

      Productivity in this sense is number of high impact articles published, amount of grant income,

      Silly me, I thought they are suppose to teach, or am I being goofy?

      Do they have the pattern of hiring adjuncts, aka temps? It seems half my classes are taught by adjuncts with many having to teach classes in several different counties to stitch together an income they can live on. I’ve heard of one soul who recently had to travel from teaching classes in a junior college two counties north of San Francisco to another college south of San Francisco, and then commute home. I believe that’s something like 70 miles one way, and though some often heavy congestion.

      All my teachers have been great, and they teach because they love doing it, but when they have to commute across the greater San Francisco Bay Area, and this pattern is similar throughout the state, to make a living, something is very wrong.

      California Higher Ed is suppose to be among the best there is and yet students are often paying dearly for underpaid teachers. Of course the leadership of the California State Colleges and Universities make serious money. Like up to the mid six figures plus benefits. If anyone can tell me of a decent reason why a chancellor can make 200-400 hundred thousand dollars, some actual teachers make a few thousand per class, instead of being tenured, I’d like to know. It couldn’t be because it’s cheaper to hiring temps, right?

      Reply
  26. Normal

    Is anyone old enough to remember rotations? The most promising young engineers were rotated through Engineering, Manufacturing, Marketing, Sales, Contracts, etc. Then they would start their management career. It worked.

    Reply
    1. Senator-Elect

      Control for the purposes of looting, in many cases.
      That may not have been the original intent, but it has been the actual effect.

      Reply
  27. flora

    I think short-term thinking took off about the time factories started off shoring in large numbers. Managers, after off shoring , had nothing much to manage besides spread sheets. The work was done elsewhere.

    This 2010 Bloomberg article is relevant. It’s by Andy Grove, one of the founders and CEO of Intel.

    ” Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

    “The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.”

    “Already the decline has been marked. It may be measured by way of a simple calculation—an estimate of the employment cost-effectiveness of a company. First, take the initial investment plus the investment during a company’s IPO. Then divide that by the number of employees working in that company 10 years later.”

    https://www.bloomberg.com/news/articles/2010-07-01/andy-grove-how-america-can-create-jobs

    Reply
    1. flora

      To add one more quote from the Andy Grove article:

      “That’s a problem. A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. “

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  28. Senator-Elect

    If Shakespeare were around today, he might have written that line from Henry VI a little differently:
    “The first thing we do, let’s kill all the managers.”

    Reply
  29. Gretchen

    Brilliant writing and comments here – enough for another book, Yves. I retired from the biggest telco after 35 years and can testify that your analysis is accurate. The truth-telling here at NC was about the only thing keeping me sane in the face of all the corporate dysfunction I witnessed.

    Reply
    1. Jeremy Grimm

      I believe I worked for a while in a portion of that same Telco. I’d been working as a contract engineer for a number of years and worked in many different workplaces. That Telco had the most poisonous work environment of anyplace I worked in my entire career.

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  30. TG

    “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.” – Huzzah! Sanity!

    It’s very simple. A tight labor market forces employers to invest in productivity, which is expensive and risky and takes effort and intelligence, and forces them to train the workers they have to make maximum use of them. A flooded labor market allows employers to skip all that pricey investment and rely on a cheap and disposable workforce. Supply and demand.

    I also note that a lot of productivity is not driven by technology, but by social adaptations. When labor is expensive, you don’t just get robots. You get labor-intensive methods substituted by less labor-intensive methods. For example, salads might consist less of vegetables that have to be picked by hand, than by vegetables that can be grown and harvested in bulk and then sliced and pickled etc. Instead of everyone having a perfectly manicured lawn, you might get a tolerance for a more natural landscape – if the costs of manual landscaping get pricey enough, necessity will force this convention on everyone. And so on.

    Reply
  31. Jeremy Grimm

    A thread of madness runs through management practice. Taylorism and its variants seem to descend from Adam Smith’s pin factory. Work in production of things is rationalized to fine details. The task is atomized, simplified, routinized, counted, measured, and standardized. Any spirit of workmanship departs. Workers loose autonomy — become carefully controlled and managed mechanisms to robotically make some atom of a product. The atoms of work and matter are assembled into grand mechanisms of production. Contemplate Ford’s vision of a factory where train carloads of iron ore and other raw materials are unloaded at one end and finished automobiles roll out the other end. This is all done in the name of efficiency and productivity. But there is madness in this vision. Human workers have been reduced to fungible cogs in a great machine responding to the owners will.

    The same thread of madness drives the micromanagement of what remains of human work. I only know from experience how this madness manifests in the world of software and systems development. Large development tasks are dissected into a million tiny pieces, each piece assigned an order in the execution of the task and a time required for execution. The task is managed week-to-week — sometimes day-to-day — schedules are constructed and constantly checked for completions.

    This management process assumes each software engineer/programmer can identify all the tasks related to their area and somehow intuit how complex each might be and how much time they will require. It assumes the task execution will and must proceed linearly based on the estimates of the work. It assumes the truth of reported completions. It assumes all the pieces will fit together nicely — at least without major conflicts. As the development proceeds the work is regarded as atomic and the workers as interchangeable, smoothly replaceable cogs. [The real world constraints on this assumption may go part way to explain the madness of efforts to hire a worker with experience and skills as nearly identical to the worker who left as possible.] These assumptions of the metaphor of software development as a factory floor have proven false — repeatedly — and should be seen as false prima facia but the micromanagement continues with single-minded obliviousness.

    The drive toward architectures and architecture products to support the assembly of software monoliths and to automate their deconstruction into a million small tasks extends a new metaphor of software development as large building construction. The million small tasks can be handed out to fungible programmers for coding — even programmers located in distant lands — and automatically assembled into a software monolith by the architecture tool. It were as if the tiny software “bricks” constructed by each programmer might be poured into a machine and a building of operational software rolls out. Ignore all mantras of reuse, efficiency, and productivity — management practice seeks to reduce human workers to fungible cogs in a great machine responding to the owners will. Managers even rationalize and manage their own work using management and tracking tools to gather and report their “metrics”.

    Proven false assumptions and false metaphors which sustain Ford’s mad vision of a factory continue to give animus to the Managerial Demiurge which in turn serves the Neoliberal vision of the Market as the final arbiter of human life. Human workers as fungible cogs better fits them as commodities to be allocated by a Market for Labor.

    Reply
    1. JBird

      Proven false assumptions and false metaphors which sustain Ford’s mad vision of a factory continue to give animus to the Managerial Demiurge which in turn serves the Neoliberal vision of the Market as the final arbiter of human life. Human workers as fungible cogs better fits them as commodities to be allocated by a Market for Labor.

      About that company (Penney’s) I worked for, that managed to economized, or efficiented, my store to death, I always wondered why they did it. To be fair, the economy had gotten worse, so profits were down, or at least only breakeven at times. But they took an always profitable (at least that is what I was told) store and killed it looking for ways to be more profitable mainly by cutting evermore experience, training, and yes enthusiasm from its employees. The store had been there for decades and had customers whose parents, and grandparents had shopped at. Some of the employees and customers had known each other for a long time.

      It took them about a decade to kill the place, so it wasn’t like a couple of mistakes were made and things went bad. Indeed, I had older employees tell had the previous management would allow them to increase sales using their knowledge and enthusiasm. Such as rolling racks of men’s clothing onto the sidewalk and holding outdoor sales! Measure the customer and have the tailor fix any sizing problems. That would have been fun.

      But it was all done away with by looking at numbers on a spreadsheet rather than what worked in reality with real people. It was just chop, chop, chop and treating the employees, or the store management, and even the customers every more like things, never mind asking any of them for help!

      I think it is an ideology, almost a religious cult, that cannot fail, for it can only be fail. I am not sure what to call it. Neoliberalism is only part of it, as is libertarianism, and Adam Smith would look on this as a perversion of his work. Even Henry Ford would think parts of as crazy for he recognized the need for the worker as customer too, which is why he gave them that famous wage increase.

      Reply
  32. Kate

    Amazing how the likes of WSJ think that the only problem with the current situation is productivity growth. If only we solve productivity growth, capitalism would start working again and we’d all be happy. It doesnt help that the NC doesnt criticize this underlying tone of the article.

    Reply

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