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Wednesday, March 9, 2011

Straight Talk About Productivity

There are some commentators running around saying the big companies are refusing to hire more people because they are wringing more work out of their existing employees. Hence, they say, productivity is a bad thing to improve.

The McKinsey Quarterly has a more sensible understanding of what improved productivity does for all of us.

Why US productivity can grow without killing jobs

Private-sector innovation and the spread of best practices can raise growth rates and spur employment.

productivity growth does not kill jobs article, productivity growth needed for economic growth, Economic Studies

In This Article

Audio is available for this article.

Does higher productivity destroy jobs? Sometimes, but only in the very short term, considering US economic performance over the past 80 years. In fact, every ten-year rolling period but one since 1929 has seen increases in both US productivity and employment. Even on a rolling annual basis, 69 percent of periods have delivered both productivity and jobs growth (Exhibit 1). Over the long term, apparently, it’s a fallacy to suggest that there’s a trade-off between unemployment and productivity. These are among the key findings of the latest report from the McKinsey Global Institute, Growth and renewal in the United States: Retooling America’s economic engine.

We are optimistic about productivity because it isn’t only about efficiency; it is no less about expanding output through innovations that improve the performance, quality, or value of goods and services. What’s more, even productivity solely from efficiency gains can, in the aggregate, lead to higher employment if the cost savings are put back to work elsewhere in the economy. Companies can pass on those savings to their customers in the form of lower prices, leaving households and businesses with more money to spend elsewhere. They can also reinvest savings from more efficient operations in new job-creating activities.

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