WSJ on "Productivity"... "Businesses were able to squeeze work forces, but that wasn't sustainable"

[Amerigo Vespucci]

SEPTEMBER 20, 2010

As Productivity Downshifts, Hiring May Speed Up

By JUSTIN LAHART



Assembling ATM components at a North Carolina plant this summer.

Companies are having a harder time boosting productivity. For now, that is probably a good thing.

Productivity, as measured by output per hour, grew at a breakneck pace last year as businesses sought to get as much work out of as few people as possible. This year that growth slowed, and then screeched into reverse. That's a sign that many companies are reaching the limit of how much they can get their workers to do. In other words, they might actually have to start hiring more.

"Businesses were able to squeeze their work forces, but that wasn't sustainable," said Michelle Meyer, economist at Bank of America Merrill Lynch. Even with her forecast of the economy growing at a sluggish pace in the remainder of this year, she reckons that companies are so lean they'll have to increase hiring.

Lackluster productivity growth usually isn't something to crow about. Without coming up with ways for workers to produce more and better goods and services, the economy can over time grow no faster than the labor force grows, leaving wages stagnant. But with the unemployment rate at 9.6%, getting more people back to work would do far more for the economy now than improving the productivity of the current work force.

Taylor Guitars is among those that say they can't keep growing without hiring more. The El Cajon, Calif.-based guitar maker has added 191 workers so far this year, and with 666 people now on its payroll has never had so many employees. That's erased the productivity gains the company saw when it went to a bare-bones operation last year, says Chief Executive Kurt Listug.

It's normal for productivity to surge in the early part of an economic rebound, as business returns quicker than companies add workers, and for those productivity gains to then recede as hiring catches up. But the recent swing has been unusually extreme. Last year, productivity grew at an average annual rate of 6.2%, the fastest pace since the 1960s. In the first quarter it slowed and then in the second it actually contracted, falling 1.8%. Such large declines are uncommon, especially in the early stages of an economic recovery.

The last time productivity fell by as much was in the third quarter of 2006, when it dropped 1.9% as the housing market fell faster than home builders could shed workers.

http://online.wsj.com/article/SB10001424052748704858304575497942728583462.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsTop