Are the cost cutting initiatives really producing productive results or are they going to have longer term implications in the economy?

In order to understand the magnitude of this issue, the first thing we need is a concrete definition of productivity. Fortunately, the Organization for Economic Co-Operation and Development (OECD) provides one on their website. According to the OECD, productivity is defined and calculated as follows:

“Estimates of productivity levels and GDP per capita permit the comparison of standards of living and underlying factors across countries. The OECD estimates are based on GDP and employment from the OECD Annual National Accounts and on hours worked from the OECD Employment Outlook, the OECD Annual National Accounts and national sources. Estimates of productivity levels are more uncertain than estimates of productivity growth, and the measures should be interpreted with caution.”

If you ignore the month to month fluctuations in productivity (volatility), and focus in on annualized productivity performance, the story is very clear. American workers are producing more incremental units of output per hour worked, although these results are not entirely related to the recession. From 2006 through 2008, the productivity factor of the American work grew .8%, 1.4%, and 1.3%, sequentially. If you compare this data to a stable 3 year economic period, 2003 to 2005, the results are actually are significantly better: 3%, 2%, and 1.5% sequentially. For all of the cost cuts that have occurred through 2007 and 2008, we still are still significantly less productive then 3 years prior to the beginning of the recession. I would expect that in 2009 the productivity measurements will be significantly higher than all 6 years of the sample.

While this trend has been reiterated and confirmed by many of the popular media outlets, including CNBC, WSJ and Financial times, there are a few selective data points that may produce misleading results in the metrics. American workers really are doing more with less; however, the measurement of GDP over productive American hours is extremely deceiving. First of all, American output has significantly decreased, as measured by GDP, from 2008 to 2010. Second, headcount reductions have reduced the number of human resources available to produce said outputs. Third, temporary and long term compensatory cuts have yet to be reinstated. Forth, CPI-U and payrolls have remained relatively flat. While productivity is satisfactory given the conditions, longer term productivity gains can not be obtained and managed through macroeconomic factors but must be managed and obtained at the firm level.

While the data itself includes several significant latent factors, including CPI-U, Payrolls, Wage Inflation, and GDP measurements, an amalgamation of factors may produce a much clearer picture. Measuring productivity is not a perfect science, nor is it something that can be measured quantitatively with precision; regardless, we must continue to evaluate our productivity, in order to maintain and build our competitive position in the world moving forward. Amidst all of the cost cutting initiatives and layoffs, I think the American worker truly enjoys improvement, progress, and innovation – after all innovation is the essence of the American way.

All in all, American productivity is Real – we are working longer, harder, and faster. The open issues lie in the output and the sustainability of productivity improvements. I am thoroughly convinced that the measure of productivity should broadly be based on a static work force and its ability to accomplish more quantitative output (based on quantity and not price). In order to accomplish meaningful productivity improvements, firms must strip out national economic factors and begin measuring volume and sales growth per individual work hour. People can not sustain extended work hours with limited compensatory rewards for long periods of time – the productivity now is most likely a short term trend. I subscribe to the following productivity train of thought:

  • All firms are NOT equal
  • All firms are NOT innovative
  • Firms require productivity to compete globally

In future entries, I plan on digging deeper on the topic of productivity – particularly in the context of innovation, efficiency, and effectiveness at the employee level. As always a few questions to consider…

  • What can firms do to ensure that they are accomplishing long-term productivity improvements?
  • What can you do individually to improve the throughput of your work or personal activities?
  • Are there any alternative measurements of productivity?

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