The ‘power’ of rising productivity

Productivity is to the vitality of our economy as trust and truthfulness are to the health of interpersonal relations, or as quality exercise and diet are to physical robustness. These may not be the best of analogies, but the point is that productivity is especially fundamental to growing a high-caliber socio-economic system.

In spite of deficits, deficiencies, debacles and disasters on many fronts in the last few years our economy has maintained a structural soundness while expanding with rather amazing consistency. Credit this more to productivity advance in the private sector than to any government fiscal or monetary policy. Thank those who are “pushing” productivity … Just in: Productivity up again last quarter!

Productivity is output per labor hour. If this ratio can increase in our society, and it steadily has been, all good comes to all of us from all directions (well almost). Let’s take a look. No one’s eyes should leave this page until they appreciate the power of advancing productivity.

1. Increased productivity in organizations means more output per unit of human resource employed – more product or service generated and available for sale. With heightened productivity, the value of what is produced rises faster than costs. This generally converts to greater revenue and profit for the company.

2. To sell the added output, prices frequently have to be cut. Now consumers benefit. Their purchasing dollars go farther, or they can save more. If a portion of the additional output does not sell, it can end up as surplus available for the not-so-well-to-do or available to use in penetrating untapped markets. In any event, lower prices contribute to a higher standard of living. And, at the same time, the lower prices lessen inflationary pressures. Rising productivity is a major inflation fighter.

3. Ascending productivity means greater efficiency. If we multiply the reciprocal of output per labor hour (labor hours divided by output) by an organization’s operating costs per labor hour, we get cost/unit of output, which is a measure of organizational efficiency. This ratio trends down (efficiency gets better) when productivity is escalating. Lower dollar cost per unit is critical for competing (just ask Wal-Mart). A business can charge, for its product, an amount as low as the cost per unit, no lower.

4. But not only do consumer and business net incomes benefit from higher productivity, employees and stock holders in productivity-increasing-organizations usually share, one way or another, in the increased profits created by the higher productivity. Higher wages/salaries and greater employee direct profit sharing tied to productivity gain is commonplace, as are higher dividends associated with the greater profits. And higher dividends drive higher stock prices, so those in stocks profit two ways.

Recent statistics show average wages/salaries have been increasing across our economy in conjunction with productivity gains, though such increases have been unevenly distributed across economic sectors, households and regions of the country.

Decline in markets for America’s manufacturing has weakened what companies can pay and, therefore, the wage earner’s take in this sector, even though productivity has been up here … Productivity is not the only factor that impacts wages. If you can’t sell your production, even though productivity is high, there may not be enough revenue to keep wages (and employment!) up. Rest assured, if productivity had not been up in this sector, wages would be more stagnant than they are.

5. Higher organizational profits and more money in the hands of employees and consumers, which come from any productivity rise, tend to keep the lid on interest rates since the demand for borrowed moneys tends to soften and the availability of money to borrow tends to increase. Of course, cheaper money motivates organizations to acquire it, thus creating a net addition of funds in flow to further stimulate the economy.

6. When productivity increases, it pays for a company to employ more resources (including the human) because company-profit maximization is typically achieved at a higher level of input. Business investment tends to increase. Higher productivity increases employment; it does not decrease it as has been suggested on more than one occasion.

7. More money for business, employees and consumers, who are directly associated with productivity increases, spells more business for other businesses plus more government tax revenue. Spending by these other businesses and government generates additional sales and profits for all. Added profits can go for what was mentioned above or can be reflected in numerous other ways such as increased leisure time for employees, improvements in the country’s balance of trade, or added investment in growth, organizational refurbishment and ways to improve productivity. The cycle is perpetuated. Society profits repeatedly and greatly.

If the government wants to help in managing the economy, it could spend more time and effort helping organizations with productivity improvement. We won’t get into it here, but there are many simple, low-cost, effective actions, such as insuring against major losses in company technology investments, giving awards for inventions that spur productivity and supporting training and motivational programs, that could pay off.

One thing is clear, fiscal policy has become pretty much a useless tool for the government because Republicans and Democrats are using it for political purposes. The Dems want to ratchet up taxes so the government can spend more; the Repubs want to cut taxes so the people can spend more.

Adjusting taxes to manage the well- being of the aggregate economic system has essentially been abandoned. Monetary policy doesn’t work so well either. Raising interest rates to reduce demand, though it usually curbs inflation, has a harsh impact on investment, profitability, wages and employment.

Dr. Phil Grant is a management innovator, author of 10 books on human performance in organizations and founder of the Law of Escalating Marginal Sacrifice. He is a professor of management and economics at Husson College. A resident of Birch Harbor, his e-mail address is: pgrant@midmaine.com.