Nearly lost in the
debate over job creation has been the surge of productivity that
has taken place over the last two years. Americans workers are
producing more goods per hour of work and boosting their own
incomes in the process. Increased productivity also means that
Americans are in a better position to gain-not lose-in the global
Productivity and Wages: Rising
The recent takeoff
of productivity is steep. According to the Bureau of Labor
Statistics, the output per hour of American non-farm workers
increased by only 2.1 percent in 2001, by 5 percent in 2002, and by
4.4 percent in 2003.
The jump in
productivity was even steeper in the manufacturing sector. While
the hourly productivity of manufacturing workers grew at a modest
2.2 percent rate in 2001, it increased by 7.2 percent in 2002 and
by a healthy 5.1 percent in 2003.
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manufacturing was the one sector of the U.S. economy that was
seriously hurt during the 2001 recession, increased productivity
still translated into higher wages for industrial workers. Their
compensation per hour after inflation is subtracted (so-called real
earnings), which declined by 0.4 percent in 2001, increased by 2.4
percent in 2002 and by 3.2 percent in 2003.
There is no
denying that the manufacturing sector took serious damage during
and after the 2001 recession. Manufacturing employment, which
according to the payroll survey stood at over 17 million at the
beginning of 2001, declined to 14.3 million at the end of 2003.
The process of
creative destruction, by which a market economy winnows out
inefficient companies and replaces them with more efficient ones,
can be harsh and was with many manufacturers over the last few
years. But the worst now appears to be over, as manufacturing
employment has remained stable in the first three months of 2004.
The companies that survived, meanwhile, appear to be well
positioned to prosper in the current recovery, along with their
It is tempting to
assume that the interests of management and employees are
constantly in conflict and that what benefits one, harms the other.
One implication of this point of view is the presumption that
improved productivity harms, or at least does nothing to help, the
interests of workers. But trends in the manufacturing sector show
otherwise. Even in the midst of job losses, manufacturing wages
improved and did so at roughly the same time that productivity
began to show a marked increase.
productivity means that labor itself is more valuable-the same
number of workers can produce more goods or produce the same goods
at lower cost. Either way, those same employees are in a position
to call for increased wages, and their employers are in a better
position to give raises. That other manufacturers might be
struggling does not necessarily change this happy state of affairs
for the firms that are doing well.
while less productive firms struggled and closed down facilities
over the last three years, more productive firms were still in a
position to thrive and spread the spoils to their own workers-hence
the sharp gains in compensation in 2002 and 2003.
Ready to Compete
Much has also been
made of the gap between wages in America and the rest of the world.
But this advantage has been earned and can still be maintained.
American workers have historically held a tremendous advantage in
productivity-the product of education, investment in equipment, and
infrastructure. As recently as 1995, the average worker in Mexico
or Brazil produced only a quarter of what his or her American
counterpart could per hour of work, and in Malaysia or India that
ratio was ten-to-one in favor of the American worker.
Low wages, by
themselves, do not make foreign workers a threat; these can be
overcome by expanding that historic productivity advantage, which
is precisely what is happening now. As long as the productivity
boom continues, American manufacturers will be in a stronger
position to compete in both domestic and world markets, and
manufacturing employment should begin to expand again.
recession was undeniably hard on the manufacturing sector, but
stability in employment numbers, combined with strong improvements
in productivity, mean that the worst is probably over. Having
fortified their long established advantage in productivity,
American manufacturers and their employees face a brighter
Paul Kersey is
Bradley Visiting Fellow in Labor Policy at The Heritage