Dynamist Blog


Here, on CNET, is a good example of the way journalists typically cover rising productivity--as bad news: "So-called smart applications will soon cause more job losses than outsourcing, and policymakers will need to tread cautiously to minimize the effect of this new trend, a new report warns."

I'm about 85 pages into William W. Lewis's excellent book, The Power of Productivity. Lewis, the founding director of the McKinsey Global Institute, draws on McKinsey & Co.'s detailed international reports on productivity in specific industries. Here's a passage that's on point:

In the 1990s, as we were finishing our productivity work on manufacturing and services, the most serious economic issue in Europe was not productivity but high and rising unemployment. Every time Europe had a business downturn, unemployment rose. Every time there was a business upturn, unemployment stayed constant. The net result was that unemployment rates in Europe were two to three times as high as in the United States. At the urging of my colleagues in Europe, we decided to see whether our industry study approach would yield new insight into the reasons for the differences in employment performance.

We quickly found that in the decade of the 1980s the United States had created far more new jobs relative to the growth of the working-age population than in Europe. The question was why. We started with the relationship that employment levels are the result of dividing the overall level of production of an economy by the productivity of the workforce.

This simple relationship has led to one of the most serious public misunderstandings about how economies work. It is tempting to conclude that if productivity increases, then employment must go down. After all, if the workforce works more efficiently, then fewer workers are needed. This line of thought stops too soon. It fails to consider what happens after productivity is improved and workers are available to be redeployed somewhere else in the economy. It assumes incorrectly that the amount of business activity in an economy is fixed. In fact, if workers are available, entrepreneurs can match them with new business ideas and investment capital and thus increase the total amount of business activity in an conomy. The production of goods and services thus increases, along with the productivity increase, and employment levels do not have to decrease....

Somehow in Europe, the efficiency of the workforce was increasing but the available labor was not being matched with new business ideas and additional equipment to create growth and employment. The natural evolution was proceeding differently in Europe than in the United States.

We looked at the structure of the European and U.S. economies and found that the employment distribution was quite different. The U.S. had far more people working in services than Europe did. In fact, the biggest differences were in residential construction and retailing. We asked why this is so. What we found is that many of the factors that distort the nature of competition and result in lower productivity also limit the production of more goods and services.

What makes the book interesting is the information it provides on just what these international differences are--how and why, for instance, residential construction is similarly productive in the U.S. and the Netherlands (and produces high employment) and far less productive in Germany and Japan.

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