Can increased productivity be an obstacle to employment growth?

EDMONTON, AB–from Troy Media

Even raising the question sounds odd, because productivity a good thing, right? The recent story south of the border – where the post-contraction task of getting the unemployment rate down has proven an uphill battle – gives us a valuable perspective on the timely question.

Fighting to keep the unemployment rate down in a slow growth environment is a difficult battle for a couple reasons. First, every year brings the entry of new workers to the workforce. But, in addition, employers continually strive to get more out of their existing employees – and they’ve been very good at that.

American labor productivity growth over the past decade, attributed largely to high-investment machinery and information and communication technologies, has been the envy of the industrialized world. After a brief slowdown in the recession, that trend has returned in force, if not in labor force. The problem is no sector has been able to expand quickly enough to add a significant number of extra workers, let alone the ones rendered jobless due to the sectors most impacted by the crash in housing.

Look at the U.S. manufacturing sector, where the story has long been that output has kept increasing despite stagnant employment numbers. That divergence has actually accelerated since the recession. Today, manufacturing output, which had dipped 17 per cent, is again at pre-recession levels. But employment in the sector remains 10 per cent lower.

Over time, yes, productivity growth is a good, no, a great thing. By definition, a more productive economy can get more out of its land, labour and capital, in turn, allowing for better pay and living conditions. That said, shocks can occur that clearly make the transition messy.