Are Productivity Increases Hurting the Job Market?

I heard a frustrating interview on NPR yesterday on my drive home from work. Melissa Block was interviewing Michael Ward, CEO of the freight rail company CSX, about how his business was doing with the recession and everything (transcript here). She seemed rather concerned with the fact that even though the company’s business was picking up again, they were still hiring fewer employees than they had during their pre-recession peak:

BLOCK: Mr. Ward, you’re also running a company that has a workforce that’s grown smaller over the last few years. You had about 30,000 workers in 2010. Back in 2006, you had 36,000. So about 17 percent fewer workers now. Why is that?

WARD: Well, two things. One, obviously, when the business is down, then we need less people to handle the trains. In addition, we’re always, as every business must do, getting more productive and finding ways to do things more smartly. But as we look at this year, we’re going to be hiring about 4,000. About 3,000 of those are to cover our expected attrition, but 1,000 are there for projected future growth and for some technology deployments we will be doing.

BLOCK: So a net gain of 1,000 still won’t put you back to where you were, say, in 2007?

WARD: No. I don’t think we will get to those levels for quite a few years.

BLOCK: What do you think that says for the overall employment picture in the country if a company that’s doing as well as yours is financially isn’t getting back to previous levels?

WARD: Well, Melissa, I guess I view that a little bit differently. I think there’s going to be 4,000 people that at the end of this year are going to be feeling pretty good about what their life is. You know, our jobs – we’re 90 percent unionized company. And a high school graduate can come to our company and make 75 to $100,000 a year in an industry that the jobs are not very exportable overseas. So I think those 4,000 people are going to feel very, very good about our company and where the economy is heading.

BLOCK: You mentioned earlier, Mr. Ward, that you’ve seen that workers have been able to be more productive even though you have fewer of them. I wonder if the lesson here for a lot of companies is we’ve been able to make more money with fewer workers. We’ve seen productivity go up. It hasn’t hurt our bottom line, and the fact it’s helped and maybe we don’t see a need to change. Maybe hiring won’t bounce back.

WARD: Well, again, I think we’re going to continue hiring at our company. It will be some time before we get back to the 36,000 you’ve referenced. But I think if you look over the next three to four years, we will be hiring more people than we’re seeing in our attrition.

A lot of companies have been posting strong earnings and profits lately, but national unemployment has not really been dropping. Conservatives blame this on uncertainty caused by Obama and the Democrats (they’ve passed so many new things, especially health care reform, that businesses have no idea what to expect in costs from the government or revenues from the overall economy in the next few years, so they’re waiting to hire until the uncertainty goes away). There is probably some truth to this but it’s hard to say how much.

Liberals, on the other hand, blame this on corporate greed (they discovered they can make money without as many employees so they don’t want to hire them back – they care more about maximizing profit for shareholders and investors than helping the “American people”). It is certainly true that many companies seem to be figuring out how to keep their profits up without hiring more employees, but this by itself does not cause joblessness. and I wished Mr. Ward had addressed the productivity-causes-joblessness narrative. Melissa got him to admit that productivity was the reason his company wasn’t hiring as much, but he twice ignored the issue about whether or not it applied to the nation as a whole and just kept talking about his company.

This is very important, because it doesn’t apply to the nation as a whole, at least not necessarily. Why do I say this? Because productivity has been rising for centuries. It’s a fundamental lesson of economics and one of the reasons we have any kind of progress at all. There was a time when almost everyone was a farmer. Today a fraction of the population grows enough food to feed far more people than all the farmers of the past ever did. But does this mean all those ex-farmers went unemployed? No, they got jobs making things and suddenly everyone could have food and typewriters instead of just food. It’s an oversimplification, of course, but the lesson of economics is that as people discover more efficient ways to do things, it frees up labor to do, discover, and create even more things. There are literally hundreds of examples of this across all of human history, and it’s essentially the reason we live longer, better, and more comfortable lives than our ancestors did.

It’s not like businesses have been trudging along for decades and then suddenly around 2008 or 2009 realized they could be more productive and leave lots of people unemployed. Businesses have been getting more productive for hundreds of years, but unemployment hasn’t been consistently rising. When specific businesses use less workers to do more things, new businesses spring up to do other things.

Now maybe we need to have a discussion about why rising productivity in the last few years hasn’t led to new jobs. The conservative nightmare would be that there is too much regulation these days that prevents new businesses from coming up to replace the old ones. The liberal nightmare might be that people are greedy and the real world market just doesn’t always work as nicely as conservatives think. Maybe there are some important fundamental differences between what has happened in the last few years and between what happened in previous years that are contributing to our long-term unemployed problem. (I know I need to read Tyler Cowen’s The Great Stagnation, because I think it tries to address some of this.)

But we can’t have a useful discussion about whether or not recent productivity is contributing to unemployment until we first recognize that increased productivity throughout all of human history has not typically led to unemployment. Only then can we try to figure out what makes today the exception, and not the rule.