“Does Better Productivity Kill Jobs?” That was the headline of a TIME magazine blog I read and set aside last winter. It also happened to coincide with a lecture I just attended by productivity expert and sometime Staffing Talk contributor Tor Dahl who says high productivity doesn’t cost jobs, it saves and creates them. Let’s take a look.
The TIME blog cited a report by the McKinsey Global Institute saying in fact, much like Tor, that growth in productivity does not lead to job loss.
The report entitled “Growth and Renewal in the United States: Retooling America’s Economic Engine,” states that not only do gains in productivity go hand-in-hand with job growth, but also that this country needs gains in productivity to spur and maintain job creation and prosperity.
If we don’t get those productivity gains? McKinsey makes the case that the U.S. economy will face a grim future.
The main reason is a fundamental change in the demographics of our workforce. Guess what? We’re getting older.
With the aging of Americans, the economy won’t get the same boost it has received in the past from the simple growth of the labor force.
So it falls on productivity to do the heavy lifting for our total economic growth.
Here’s a piece from the report:
In the first decade of the 21st century, productivity gains have already contributed 80% of total GDP growth compared with 35% in the 1970s. The expectation is that this trend of greater reliance on productivity for GDP growth will continue…If we look just at the last two decades and aim to recapture the 2.8% growth in GDP of that period, labor productivity growth needs to increase from 1.7% per year to 2.3%—an acceleration of 34%.
In the first decade of the 21st century, productivity gains have already contributed 80% of total GDP growth compared with 35% in the 1970s. The expectation is that this trend of greater reliance on productivity for GDP growth will continue…If we look just at the last two decades and aim to recapture the 2.8% growth in GDP of that period, labor productivity growth needs to increase from 1.7% per year to 2.3%—an acceleration of 34%.
The facts come flying at you fast and furiously in a Tor Dahl lecture on productivity, as one might expect given his credentials that include the title Chairman Emeritus of the World Confederation of Productivity Science.
However, there is one rather simple one-two punch I managed to capture in my notes during a presentation to a group of international students at the Humphrey School of Public Affairs, the University of Minnesota’s school of policy and planning.
Dahl echoed the McKinsey report saying basically there are only two ways to achieve economic growth: increase the labor force (our labor force will instead actually shrink until 2030), and/or increase productivity.
“The more productive we are, the safer our jobs are. That has always been the case,” stated Dahl.
“The more productive we are, the safer our jobs are. That has always been the case.”
He stated further that if you guarantee people they won’t lose their jobs, they will eventually do their jobs cheaper, faster and better by a factor of 55%.
Dahl is Norwegian by birth, and he recalled the economic story of his own country as a lesson that could – and should – be learned and copied by the U.S.
After World War Two, Norway’s economy was tattered and torn. The Prime Minister called for austerity, saying rebuilding would require time and patience and that nothing should be wasted on frivolous consumption.
There was a certain Norwegian economist who begged to differ though, who called for investment in economic growth. And he wasn’t just any old garden-variety economist. No, Ragnar Anton Kittil Frisch later went on to become co-winner of the first Nobel prize in Economic Sciences and is credited for founding the discipline of econometrics and coining the terms macro and micro economics.
I guess the Norwegians must have listened to the economist instead of the politician, because Norway went from being the second poorest country in Europe to the second richest economy in the world.
So maybe it’s time to listen to another Norwegian economist. One like Tor Dahl, who says, “In virtually every state and nationally as well, austerity is on the agenda. There is little or no focus on growth and productivity. The current slogans are, ‘We cannot spend money we don’t have’ and ‘We cannot take on more debt.’ Yes, investing in productivity and growth is exactly what America must do to add value and create jobs.”
Here, here! Or hurra! as they might say in Norwegian.
Anyway, Dahl presented a paper to the university class with the headline “Austerity Is a Failed Strategy.” The subhead is Growth is what is needed. I quote from that copyrighted paper here.
Currently about 25 million Americans are unemployed or underemployed. Were these people to become fully employed, they would add another $2.5 trillion to our GDP. A $10,000 annual stipend over a four-year period to allow an unemployed individual to complete a chosen educational objective will cost $1 trillion – about the same as we paid to bail out the banks and the automobile manufacturers – but it will pay for itself many time over the lives of those who are now unemployed. In 10 years, the investment will have added $25 trillion to our GDP for a return of 25:1.
Currently about 25 million Americans are unemployed or underemployed. Were these people to become fully employed, they would add another $2.5 trillion to our GDP. A $10,000 annual stipend over a four-year period to allow an unemployed individual to complete a chosen educational objective will cost $1 trillion – about the same as we paid to bail out the banks and the automobile manufacturers – but it will pay for itself many time over the lives of those who are now unemployed. In 10 years, the investment will have added $25 trillion to our GDP for a return of 25:1.
I am certainly not an economist, nor a policy maker, but Dahl makes a compelling case.
As I end with another quote from Tor Dahl, I encourage you to write your Congressman or Senator to voice your views on this matter. Or just drop us a line via the comments section below. That’s probably easier. We listen better as well. Here’s Tor Dahl again, and he’s preaching!
“This is the new Sputnik moment. This is our moonshot. This is, indeed, the change for which we have been waiting. And this is the only approach that will create lasting jobs: Lifting the productive contribution of every man, woman and child in America.”
{ 10 comments… read them below or add one }
enjoyable post David, thanks. i wish i could have been at the lecture.
i do have questions though. is the federal government the best deal for this investment? what about the alternative, letting individuals and business do the investing?
what of an argument that says sure it was a good deal for Norway back then and was for the USA in the 1950s, but now it isn’t? Don’t regulations, unions, and bureaucracy cost too much now to send money to Washington?
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Thanks for the comment Gregg, and for opening up a whole other can of worms in private vs. public investment.
First of all, you would have really enjoyed the lecture and asked some great questions I’m sure, as you did here.
Your second point is also well taken. Last night I was at an event with some global business development execs from 3M, IBM and Ecolab. The former CTO for the state of Minnesota responded to a question about cost cutting and he said he would find ways to save the state money, $10 million over here, some other millions over there, and that “they would just find other ways to waste it somewhere else.” And this low opinion of the government’s stewardship from a person who has spent most of his life in the pubic sector.
I will see if we can get Tor Dahl himself to weigh in on public versus private. But I did just come across a great article in the new Vanity Fair magazine called “The Book of Jobs” by Joseph Stiglitz, an American economist and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences and is also the former Chief Economist of the World Bank.
Stiglitz writes, “What we need to do instead is embark on a massive investment program – as we did, virtually by accident, 80 years ago – that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment.
“The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed – even if the Feds were to keep interest rates as zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy, but focus instead on creating a new one.”
So that’s his opinion. Do we have others?
Funny you should ask!
I just spent the entire morning with the Minnesota State Demographer, Tom Gillaspy. He and Tom Stinson, the State Economist, are good friends of mine, and both advocate what you and I have talked about: The key focus should be on productivity.
Stiglitz probably referred to Government investments that were infrastructure focused, such as the Hoover Dam, and the Interstate Highway System. Both were capitalized through Government guaranteed loans, but actually performed by private companies—the Hoover Dam was built by Morrison-Knutson, and the highway construction was done by numerous private contractors after a bidding process. The rule of thumb is that what the private sector cannot accomplish on its own (lighthouses, highways, dams, ports, defense, etc.) since there is no practical way for for-profit entities to raise, and make, money on this kind of investment on their own, Government needs to step in to help with the financing and bidding process for such investment purposes. The infrastructure investments under Hoover, and particularly under Eisenhower, were the foundation for the post war prosperity in gaining quick and effective transportation of goods, and coordination of distribution via ports, waterways and airports.
But this is was NOT what yielded the highest returns! In 1945 the Truman Administration had incurred a war debt of 119% of GDP, and the returning GIs into the labor force had caused unemployment to rise to 14%, much higher than it is today. Truman added 3% more to the total debt—that brought it up to 122% of GDP, and with that he financed the GI Bill, and subsequently, the Marshall Aid for Europe’s Reconstruction and Development. The GI Bill created the American Middle Class, and the Marshall Aid built the foundation for the post war prosperity for the entire Western Europe (all of Europe could have participated, but Stalin refused any aid, and that was eventually what brought the Soviet Union down). The war debt was paid off in 18 years, together with the entire cost of the GI Bill and the Marshall Aid. How? The investments made caused the economy to grow faster than 5% per year. Had we kept this investment level up until today, our GDP would have been $45 Trillion instead of $15 Trillion, and we would have had no debt, Medicare/Medicaid/Social Security would all have been fully funded, and our per capita income would have been three times higher.
Note that Japan had no resources of her own, other than her own people. It was the investment in people that made both the US and Japan the two dominant economies of the post war period. And it was the investment in capital intensive industries that made people productive enough to be paid high wages.
Stiglitz has an eye on the Knowledge Economy, now 80% of our GDP. Peter Drucker told me that the single greatest challenge in the 21st Century would be to increase the productivity of knowledge workers. When I showed him what we had achieved in that area, he said that the invention of the Extensor System (our system) had produced a tool that would do for management what the telescope had done for astronomy. We guarantee 100:1 ROI for investments in productivity improvement. Where else could you find returns of this magnitude?
Thanks for coming to the lecture, David, and congratulations for making such good use of the handout we provided! It was very well done by you, with persuasive argumentation and excellent writing.
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Timely article – and one point that I wish we would quit assuming and start challenging:
“The main reason is a fundamental change in the demographics of our workforce. Guess what? We’re getting older.”
The US is facing formidable global competition for jobs because our labor rates for industrial and knowledge work are far above global market norms. Productivity is a measure of economic output vs. economic input.
We are growing older; we demand above-market incomes; and we would rather export jobs than import workers. I maintain that the US can revitalize our industrial and knowledge work base by simply opening up LEGAL immigration of workers.
Immigration reform would enable greater productivity in the US; increased economic activity as immigrants buy homes, goods, and services; increased tax revenue; increased opportunity for entrepreneurs and small businesses.
Tor, I would be curious to get your thoughts about what it would “look like” if the US population were to increase by, for example, 15 Million people, all immigrants, all with jobs, all that currently work for US companies in other nations. Would that make a difference in our economic outlook? What would you recommend in terms of a minimum wage for such immigrants, if any?
Thanks for you insights!
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Thank you so much for your detailed and thoughtful comment(s) Greg. Staffing Talk might not be the most likely venue or forum for these types of discussions, but I promise you we all love them when they do occur. So we appreciate the debate and discourse!
I’ll be honest, I have not heard this argument of legal immigration boosting the economy before, so I have little context or perspective to offer.
It didn’t take me very long though to find plenty of broad support for the idea when I did do some research.
Gary Martin, out of the Hearst Washington bureau, cited a study to use one example that “legalizing the status of the roughly 12 million undocumented immigrants living in America would create jobs, increase wages and boost the sagging U.S. economy.”
The study by UCLA associate professor Raul Hinojosa-Ojeda found that citizenship and flexible limits on legal immigration would serve future labor demands and boost wages for native-born workers.
“Immigration has a positive effect on the economy,” Hinojosa-Ojeda told reporters, saying legalizing undocumented immigrants already in the United States could add $1.5 trillion to the gross domestic product over the next 10 years.
That is a slight twist to the scenario you describe Greg, when you suggest opening up legal immigration to those with jobs.
I’ll see if I can get Tor to comment. Thanks again for reading – and responding.
Hi David,
Thanks for the thoughtful reply.
While immigration reform may not seem like a “direct hit” on the topic of staffing, in my experience employers often must look at whether a job should be staffed in-house, locally through a contractor, or outsourced to another nation that can perform the work more efficiently (i.e., searching for higher productivity).
Outsourced staff is central to the discussion about American competitiveness and job growth. If we are to see any meaningful job growth, we as a nation must have staffing costs that are globally competitive, or companies will hire the staff where it is competitive. Job creators in India, Mexico, Philippines and China understand that offering higher productivity workers (higher dollar output per dollar input) places them in a highly competitive position to meet the global demand of staffing needs. There is limited demand for high cost staff in the global labor market.
Until we can address gap between US staff / productivity vs. global alternatives, we will continue to witness reduced demand for US staff and decreasing wages. Supply and demand dictates that our wages will need to fall to the point where there is enough demand to employ our population. I don’t know how low our wages will need to go, but when the going rate for global unskilled labor is about $1-$2 per hour, and knowledge workers can be hired for $3-10 per hour, we have a long way to fall.
Daniel Pink provides an insightful view for the direction we need to be going in his book “A Whole New Mind: Moving from the Information Age to the Conceptual Age”. Alan Greenspan identified fundamental shifts in the global economy in 1998 and coined the term “Conceptual Economy” to describe them. Prescient observations that we can all learn from.
Thanks again for the interesting post.
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I love Daniel Pink and quote A Whole New Mind often. I am also currently reading Drive: The Surprising Truth About What Motivates Us. Equally fascinating. I posed your question to Tor. Read his response below.
Good question! Thank you!
We can only create growth in two ways: Either by increasing the work force, or increasing the productivity of the work force. Thus 15 million new immigrants would likely increase the US GDP, provided they find employment here, and that the US companies that sent these workers home, could find equivalent replacements if they decided to keep their foreign operations going. As for the productivity of the 15 million immigrants: That depends initially of things like education, literacy, motivation, and other factors. Minimum wage means little for educated or skilled immigrants, but may prevent low skilled jobs from being filled by immigrants if the value added of their work does not exceed the cost of the minimum wage. It is, however, unlikely that the 15 million will find or be suited for the exact same jobs at the same pay that they originally held for their American employers abroad. Why?
The main reason for US companies to hire workers abroad is either to benefit from lower wages, or higher productivity. Right now wages have risen to near American levels, or higher, in a few countries like Germany and Holland, so work that used to be done by Dutch and German workers is now moving to the old Soviet Union: Estonia, Latvia, Poland and Hungary. The US is also repatriating workers from India and China in order to make use of uniquely talented workers. However, the jobs that the 15 million left behind, may not exist in the US.
In a knowledge economy, age is less of a factor—highly skilled and educated “oldsters” are often far more productive than less experienced younger people. It is in everyone’s interest to keep such people working, otherwise the massive retirement of baby boomers will both create a serious labor shortage, AND a possible reduction in productivity. That will in turn lower wages, and in a global economy, increase unemployment for the already smaller labor force.
Keep in mind that it is usually the best and the brightest that seek out the US from foreign lands. They are creating many new jobs for Americans in their adopted country, and are responsible for the a majority of new start-ups in Silicon Valley. Those jobs are highly paid. In Minnesota our own labor force will shrink until 2030, and productivity improvement is now our only strategy for raising wages and growing our economy.
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Thanks for the response, Tor.
I’m trying to understand why, if a US company hires a knowledge worker in India, for example, that the knowledge worker would show any difference in productivity if living in the United States. The reason his / her job is not available in the United States is a function of our immigration policy and minimum wage restrictions. My whole point is that immigration policy and minimum wage restrictions are the problem!
Look at the software industry as a classic example. We need more engineers, and the H1B visa program allows only so many. Worse, we send the engineers back home to India or Philippines or China, where they establish companies that employ more software developers that we could use right here in the USA. We simply choose to export the work, rather than import the worker, because of an irrational fear that having cost-effective labor here somehow displaces jobs. It doesn’t.
How does exporting jobs help US companies to grow US employment? How does that help to build demand for homes, products, and services that would be sold by people living right here in the US? Population growth drives economic growth, or we risk that our aging and stagnating population growth will take us in the direction of Japan.
15 Million immigrants – ALL of them working at jobs they already do – that would have an enormously positive impact immediately. Instant recovery. We would have make room, start building, and start the process of adapting to a larger, more vibrant economy.
I choose 15 Million just as a “round number” that causes us to think about what direction immigration takes us, if done in large doses. Global demand to immigrate to the United States FAR exceeds that number. Demand to immigrate here may be our most powerful competitive advantage.
This is still the land of opportunity. We know how to use cost effective labor – we’ve proven that all over the world. The question is not IF we can do it, but whether we choose to maintain our policies that keep those workers in other countries, or bring them here where we can manage them and grow our own economy.
Think about it. Who in the world knows best how to employ cost effective labor?
Americans!
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Greg Lins
very much agree with your direction on this Greg. every barrier to free trade including that on labor creates market inefficiencies…hurts us all in the long run.
as someone who recruits globally however i don’t find our laws draconian here…usually we have no problem getting the appropriate visa for someone we want to bring in
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