Productivity rise in USA: Its nature and implications

In the recent past productivity in USA has increased by taking a quantum leap. In the third quarter of 2003 productivity in USA is stated to have grown by 8.1 percent in the non-farm business sector -- and it has grown at an average rate of 5.4 percent in the last two years --fastest pace for a two-year period in more than 50 years. The impressive performance in the US -- driven largely by the production and diffusion of technology -- has attracted a lot of attention and widened the gap in productivity between US and Western Europe.

According to some experts, this surge is not simply a product of the business cycle, even accounting for usual up tick in productivity after a recession. In the first two years of the six most recent recoveries in USA productivity gains averaged only 3.5 percent. The favoured explanation is that improved productivity is yet another benefit of the so-called New Economy. American business has reinvented itself. Manufacturing and Services companies have figured out how to get more from less. By using information technologies they can squeeze ever-increasing value out of average worker.

But is it true? Is it correct to assume that this productivity really reflects true increase in production? Are the yardsticks used to measure productivity of workers dependable? Even if there is a surge of such increased productivity is it going to be a permanent feature of American methods of production? Lastly, what social and economic consequences entail such productivity rise?

First of all, productivity measurement is more an art than science -- particularly in America's vast service sector, which now employs about 80 percent of the nation's private work force. If productivity is calculated as the ratio of output per unit of work time how do we measure value added in the amorphous service sector? The numerator of production output is hopelessly vague for service. For many years statisticians have used worker compensation to approximate output in many service industries, which make little or no intuitive sense. The denominator of the productivity equation -- units of work time -- is even more spurious. Government data on work schedules are woefully out of touch with reality --especially in America's largest occupational group, the professional and the managerial segments which together account for 35 percent of the total work force. Take for example, financial services. According to American Labour Department, the average work-week has been unchanged at 35.5 hours since 1988. That seems to be patently absurd in view of the fact that profusion of portable information appliances like laptops, cell phones, personal digital assistants etc. along with near ubiquitous connectivity through hardwired and now increasingly wireless, most information workers can toil around the clock. The official data do not come close to this new shift in the manner of working. The official productivity measurement does not take these developments into account. The fact remains that to the extent productivity miracles are driven by perspiration than inspiration, there are limits to productivity gains.

Again, the contention that increased productivity in Corporate America is showing up in the bottom line in the form of increased profits also does not seem to be true. When better earnings stem from cost cutting there are limits to future improvements in productivity. Strategies that rely primarily on cost cutting will lead eventually to hollow companies -- businesses that have been stripped bare of once valuable labour. That is hardly the way to sustained prosperity. There is no precedent for sustained productivity enhancement through downsizing. America's present productivity revival may be nothing more than a transition from one way of doing business to another -- a change in operating systems. Aided by the stock market bubble and the Y2K frenzy, corporate America led the world in spending on information technology and telecommunication in the latter half of 1990s. This resulted in an increase of the portion of gross domestic product that went to capital spending. With the share of capital going up the share of labour went down. Thus national output was produced with less labour -- resulting in windfall of productivity. Once the migration from old technology to the new starts to peak the transitional productivity can be expected to wane. With tumbling of the growth of high-tech industries in the last few years for lack of demand as predicted, sights of jobless recession and jobless recovery are appearing on the scene. This has some serious economic and social consequences in the long run.

One element that is surfacing now in Corporate America is increasing use of foreign labour. One example is "Can I help you" jobs are now more and more being transferred to India from USA. Much as exodus of manufacturing jobs abroad did in the decades in the past sending services or knowledge intensive jobs to countries like India in causing fear of displacement in the United States and elsewhere. A study by Forrester Research of Cambridge, Massachusetts estimated that this type of labour migration generally referred to as outsourcing, if contracted to another company, or off shoring if run by a company itself, could send 3.3 million jobs overseas by 2015. India with its large pool of English speakers and more than 2 million college graduates every year is expected to get 70 percent of them. In fact it is estimated that about one million Indian workers are already working for corporate America engaged in call service, customer reservations for airlines, selling thousands of products of Americans by telemarketing, providing bounced check records to American retailers, customer service help to welfare and food stamp recipients, prepare tax returns, evaluate health insurance claims, transcribe doctors' medical notes, analyse financial data, read CAT scans and even prepare presentation papers for Manhattan investment banks etc. All these are of course in addition to the work done by big Indian based international companies who are operating in hardware and software computer field. Even other industries including automobiles, pharmaceuticals have gained from an increased demand for high quality products made in India's low cost manufacturing plants.

Within USA such cost cutting measures in the name of increasing productivity are being done by many major leading companies, led by Wallmart. Wallmart is the largest American corporation in terms of sales with $245 billion in 2002. It is now the largest grocer and furniture dealer in USA. More than 30 percent of the disposable diapers purchased in the country are sold in Wallmart as are 30 percent hair care products, 26 percent of toothpaste and 30 percent of pet food. Wallmart has nearly 3000 stores in the United States and plans to add an additional 1000 over the next five years. Increasingly the company is taking its formula abroad. Wallmart is now the largest private employer in Mexico. It now imports merchandise worth $20 billion from China alone.

Its formula of success is to cut the costs to the minimum, by diversifying the sources of supply, squeezing the labour to the maximum by iron discipline, by not allowing union formation (there is a union probability index for each employee) by giving bare minimum wage, by employing immigrant labourers, often illegal aliens, denying health care and pension benefits to the employees and offering the lowest prices to the consumers compared to other companies. According to the study of Mckinsey and Company the ruthless efficiency of Wallmart's supply chain accounts for as much as a quarter of US economy's recent productivity gain.

Following the example of Wallmart some European companies which have to pay much higher wages to their workers in their home countries, are making forays in the USA. For example 800 outlets in Europe have opened about 70 stores in North East USA. They plan to open 12 to 15 stores a year in the United States. The policy of the company in Sweden was to make sure that nobody whose work is contributing to its success is deprived of his or her human rights or suffers mental or bodily harm. In the United States though, in the age of Wallmart, the company is resisting workers' attempts to unionise. It has thrown organisers out of the stores and called the police when UNITE began organising outside one of its plants.

Meanwhile, another pillar of Euro-corporate company, the Danish security company Group 4 Falk is taking a similar tack with the thousands of security guards it employs in the United States, since it purchased Wackenhunt Corporation in May 2002. In Denmark, Group 4 Falk's security guards receive 111 hours of training and make between $16.00 to $19.00 per hour. In the United States its guards receive as little as one hour's training and pull down an hourly wage of $8.00. In suburban Chicago where the service employees' International Union won family health insurance for guards at 30 companies, Group 4 Falk refused to sign the contract and informed its employees that if they wanted to maintain their company health insurance they have to leave the union. So when European employers look to the United States, they see wrongly the same thing when they look to China: Millions of low wage workers who have all but lost the right to organize the government intent on keeping things just the way they are.

Furthermore, another question remains: Even if USA is able to produce more because of increased productivity who will buy the increased volume of goods and services? The widening gap in productivity between Europe and USA underlines some of the largest risks facing the world economy, namely the US's trade deficit, the world's over dependence on US economy for growth and Europe's aging society. The divergence ensures that global economic growth will continue to rely on debt laden US customers, a burden they would not be able to shoulder forever. The head of WTO has highlighted these problems when he recently stated, "We are globalising in a way that most economies in the world are becoming more dependent on US health. If the US drives this process by incurring more imbalances this is a difficult trend for us all" -- US included. The implication of increased productivity simultaneously with jobless prosperity has been highlighted by Democratic Presidential candidate Senator Edwards in his "Two Americas" speech. "One America that does the work, another America that reaps the reward. One America that pays the taxes, another America that gets the tax breaks...One America -- middle class America -- whose needs Washington has long forgotten, another America -- narrow interest America -- whose every wish is Washington's command."

Finally what goes now in USA as productivity rise, is not really a sign of efficiency but the outcome of sham profits shown by Corporate America by manipulating their books and depriving the labour their legitimate dues. These scandals are coming out on newspaper pages almost every day. The last word on this issue has been depicted in a cartoon in which one asks if there has been so much productivity what the Americans do in their spare time, and the answer was "Trying to delete spam".

From what has been stated above it will be clear that US will no longer enjoy the benefits of globalisation alone. Backlash of globalisation -- what poorer countries were complaining of -- are now washing the shores of USA. Faced with this development and the opposition to free trade by poorer countries in the recently concluded WTO meeting in Cancun and the summit meeting of 34 Latin American and Caribbean countries at Monterrey, Mexico, USA is in a bind to reconcile its cry for free trade and globalisation with its national interest. The issue that ought to be decided by her is simply this: What is an acceptable price to pay to restore a measure of fairness, equity and economic security for its people? This fundamentally is a political issue, not an economic one.

It is again the same question that the political leaders in Bangladesh should ask themselves when they, led by bureaucrats, business elites and foreign advisors are embarking on a campaign of "productivity rise" by mere cost cutting measures and through lay off of workers in disregard of social mores and economic realities. If they fail to do this they will soon face serious social unrest and political turmoil. Unfortunately for us, we have a political democracy which itself suffers from "democratic deficit" in governance of the country.

AKN Ahmed is a former Governor of Bangladesh Bank