Causes of Declining Productivity

Economists point to many reasons for the decline in American productivity, saying each reason con­tributes a small amount.

Changes in the Labor Force. Some economists and leaders say that since the mid-1960s many peo­ple entering the workforce have lacked the same level of work skills and attitudes. Others point to poor management decisions for their negative effects on productivity. Still, few would argue that the U.S. needs a well-educated and properly trained work­force to remain competitive and improve productivi­ty.

High Energy Costs. At one time cheap energy accounted for productivity increases. This is no longer true. In 1973-74 oil prices increased dramatically due to policies of the Organiza­tion of Petroleum Exporting Countries (OPEC)- a cartel estab­lished by oil-producing countries to regulate the supply and price of oil. These price increases had a major impact on productivi­ty in the U.S. and in all industrialized countries. Money that might have been used for new and more productive machines (capital investment) or in other ways to increase productivi­ty has gone into paying for higher energy costs, find­ing new energy sources, and making equipment more energy efficient.

Declining Investment in Public Capital. Our

nation's productivity is directly related to the quan­tity and quality of available capital (factories, tools, equipment, etc.). While most capital is privately owned, 45 percent is owned by federal, state, and local governments. The largest portion of public cap­ital is often called the infrastructure, which includes highways; airports; mass transit; and electric, gas, and water facilities. The second-largest portion is buildings, including schools, hospitals, and passen­ger terminals.

Since 1973 U.S. investment in public capital has fallen behind the growth in the labor force. This has caused the infrastructure to deteriorate and produc­tivity to drag. Many economists argue that if govern­ment does not increase spending on public capital, future generations could be burdened with a poor infrastructure and lower productivity levels.

Reductions in Research and Development (R&D). Why is that important? Through research new products and production techniques are devel­oped that can improve productivity. Increasing pro­ductivity may enable a company to increase wages, increase dividends to stockholders, or expand-all without raising prices. One measure of investment in R&D is the number of patents issued. The num­ber of patents issued to U.S. residents since 1971 has fallen steadily. Some say that America is losing its top place in technological development. In fact, U.S. spending on research and development as a percentage of GDP from the 1970s until now has remained fairly constant. Meanwhile, Japan and Germany, our global competitors, have outpaced the U.S. by continuing to increase their spending on research and development.

Growth in Service Industries. Until 1970 people shifted steadily from lower productivity farm jobs to higher productivity jobs in business and industry. Beginning in 1970 that trend slowed as employment increased in the service industries - health care, appliance repair, and education or training, for example. Employment in business and personal ser­vices rose from 12 percent of the labor force in the 1950s to 19 percent in the 1970s. While this rate of growth has slowed, many individual service occupa­tions continue to grow dramatically. Unfortunately, some service industries, such as health care, have made very slow productivity increases, and in others productivity is hard to measure. Some argue against measuring productivity as output per employee in areas such as health and education, where the human factor is so important.

American Productivity: The View from MIT.

A recent study by a team of engineers and econo­mists at the Massachusetts Institute of Technology identified additional reasons for low productivity gains in eight of America's major industries. Here are some of its findings:

• Obsolete business strategies. The researchers found that some American firms relied on out­moded procedures. For example, the automobile industry often negotiated annual contracts with suppliers. These manufacturers would be wiser, the engineers argued, to offer long-term contracts to suppliers and require them to invest in improv­ing their plants, productivity, and quality.

• Short- vs. long-term profits. Too often, the researchers argued, American companies adjust­ed their policies to gain quick profits. As an exam­ple, the MIT group cited the automobile industry's reaction to Japanese voluntary export reductions in the early 1980s. Auto companies could have increased their market share by maintaining or lowering prices. Instead, they raised their prices.

• Invention vs. production. American engineers invented color TV and the VCR, but the Japanese produce most of them now. The MIT group sug­gested American firms did not apply R&D in ways that would improve their profits and market share in the long run. The Japanese have focused on developing new, more efficient, more profitable processes for producing such products.

• Invest now, consume later. The money used to buy capital goods comes from funds people set aside as savings. If the public prefers to buy now and save later, less will be available for invest­ment. However, only government can create the kind of climate needed to encourage people to save. The MIT group argues that many of govern­ment's policies stimulate business and consumer spending rather than saving.

Date: 2015-02-16; view: 887