May 5, 2004 | WebMemo on Jobs, Jobs and Labor Policy

Ready to Compete: The Link Between Productivity, Jobs, and Wages

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 marketplace.


Productivity and Wages: Rising Together

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.


Rising Productivity and Wages

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And while 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 employees.


Shared Interests

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.


Increased 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.


Consequently, 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.


The recent 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 future.


Paul Kersey is Bradley Visiting Fellow in Labor Policy at The Heritage Foundation.

About the Author

Paul Kersey Visiting Fellow