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Better, Faster, and Smarter Services
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19904 |
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CURRENT ISSUES
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| Issue
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4 / 1992 |
3,005 Words |
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William C. Freund
William C. Freund is professor of economics and director of
the Center for the Study of Equity Markets at Pace University. |
My students sometimes look at me in puzzlement when I discuss productivity with them, as if the concept were some sort of economic abstraction concocted as the figment of an academic imagination. That is never the attitude of experienced businesspeople. They understand that productivity determines their prices, their competitiveness, and in the longer run, their survival in the market places.
Productivity is a measure of efficiency. Though difficult to gauge in practice, it measures output per person over time, or better yet, output per unit of both labor and capital. If we become more efficient in production, output per unit of input will improve and, as that happens, costs of production will decline. I tell my students that if productivity grows rapidly, we can afford to pay higher wages without pricing ourselves out of international markets. In the longer run, productivity growth determines the level of per capita incomes and our nation's standard of living. In the longer run, real wages can rise only if there is an improvement in productivity. Productivity and prosperity are thus closely linked.
Not many years ago, in the late 1970s and early 1980s, we began to worry about our ability to generate the sort of gains in manufacturing productivity that would keep the United States an effective competitor in world markets. It looked like manufacturing productivity was slipping badly in this country, undermining our competitiveness and prosperity. That was the time when the media began reporting about the rusting of American manufacturing, when the term Rust Belt made its way into the public vocabulary.
The Good Old Days
In the "good old days" of the 1950s and'60s, the United States prided itself on a productivity growth of around 2.5-3 percent a year, not every year but on average. That may not seem like much, but compounded, a 2.5 percent annual increase doubles output per man-hour every 29 years. At 3 percent per annum, it doubles every 20 years!
During the 1970s and the earlier years of the 1980s, U.S. productivity somehow lost its way. We don't know all the factors involved, but they had something to do with lackluster investment in new plants and equipment, inadequate expenditures for research and development, deteriorating infrastructure, a deteriorating educational system, and obsolete labor practices and management systems in many
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