Nonfarm Business Sector: Real Output Per Hour of All Persons (OPHNFB) | FRED | St. Louis Fed (stlouisfed.org)

I formally retired this Spring at age 65. I started working in 1966 at age 10 as a newspaper delivery boy. I’d like to reflect on the big changes in the economy during these 5 decades.

The US Bureau of Labor Statistics tracks the real output per hour in the nonfarm business sector, or “labor productivity”. The media reports this number as it has “real” and “political” importance. The average annual improvement has been 1.9%. That is a 95% increase in 50 years, nearly a doubling, on an arithmetic basis. However, productivity compounds geometrically, just like compound interest, so the 2020 worker is actually 159% more productive. Or, the 1970 worker was 39% as effective as the 2020 worker!!! The 2020 worker delivered 5 units of output for every 2 units of output in 1970!!! Expressed in these terms, it’s clear to see this is a really important measure.

The annual productivity increase has ranged from -1.6% (1974, when I finished high school) to 4.5% (1992). 3 times below 0% and 3 times above 4%. The measured productivity growth increases and decreases through time. From 1970-76, labor productivity grew by 2.4% annually, a very good result. This was the end of the post WWII boom period. Japanese and European competition, oil cartels, sleepy consolidated industries, environmental laws and stagflation disrupted this progress. The next 13 years (1977-89) were a time of transition (disco). Labor productivity grew by just 1.4% per year, despite the early positive effects of the computer revolution. 1% per year lower doesn’t look like much, but it means that output in 1989 was 13% less than it would have been if the country had maintained it’s early 1970’s productivity improvements. The impact of the “Reagan Revolution” in freeing American capitalism from regulations and taxation was not clear during his presidency. The next 8 years (1990-97) showed some improvement, to 1.7% annually, but not a true revolution that either Bush or Clinton could celebrate. The next 13 years (1998-2010) were the golden years for improved labor productivity, averaging 2.9% annually, DOUBLE the improvements from 1977-89. The later Clinton years and the whole George W Bush presidency witnessed these results. The next 6 years (2011-16) reflected the slow recovery from the Great Recession with labor productivity growing by just 0.7% annually, half of the poor 1977-89 time frame. Productivity growth started to recover in the last 4 years, averaging 1.7%.

Economists tend to focus on the role of “capital” in driving labor productivity. In essence, if workers have more or better machines and computers, they will produce more per hour. In very rough terms, about one-half of labor productivity improvements come from better tools.

How Capital Deepening Affects Labor Productivity (stlouisfed.org)

The economists who try to measure the output part of labor productivity (real GDP) try to be consistent and conservative. That means that they understate real GDP. They don’t include the value of reduced pollution. They try to adjust for the improved quality of goods and services, but count only the obvious benefits. In a world dominated by services, this is a major gap. They make no attempt to estimate the benefits of less time spent buying goods and services. They make no estimate of the value of shorter delivery times. They are unable to account for the benefits of transparent and deep markets for goods and services.

Finally, they do not account for the value of product variety, broader consumer choices and customized goods. The fact that modern products more exactly fit consumer needs adds no value to GDP. By the 1990’s firms understood the universal customer value framework (QSFVIP) outlined by Deming, Juran, Shingo, Schonberger and others.

Amazon.com: Building a Chain of Customers eBook: Schonberger, Richard J.: Books

Firms understood Marshall Field’s dictum to “give the lady what she wants” and pursued it with a vengeance in order to gain market share, fight imports and improve margins. Based on my experience, firms devoted at least as much time to delivering upon these “soft”, qualitative, unmeasured productivity factors throughout the last 50 years. Hence, true productivity growth may have been twice as high as officially reported.

What changed in 50 years?

Secretaries and administrative assistants disappeared. Managers and professionals learned to do their own “paperwork”.

Clerks disappeared. Fewer transactions. Lower transaction costs. Standardized transactions. Automated transactions. No data entry operators.

All processes were subject to measurements like Ford’s assembly line.

More “analysts” working to improve all functions. Not just chemistry and engineering specialists. Financial analysts, marketing analysts, pricing analysts, logistics specialists, forecasters, inventory specialists, brand managers, compensation analysts, trainers, quality specialists, process engineers, systems engineers, professional purchasing analysts, etc.

Documentation revolution. Policies and procedures. Standardization. Say what you do.

Quality/process/TQM/lean 6 sigma revolution. Every activity can be defined and improved. Do what you say. Improve.

Process management via Goldratt’s theory defined in “The Goal”.

Import substitution due to lower transport, finance and transaction costs.

Outsourcing and specialization. Finance, accounting, HR, engineering, IT, facilities, marketing, advertising, logistics, distribution, legal, labor, manufacturing, design, project management, testing, returns, maintenance, leasing, equipment rental, etc. Stick to your core functions.

Flatter organizations. Fewer middle management layers.

New product introduction as a well-defined process that can be improved and outsourced.

Business viewed as a portfolio of products and channels and markets.

Competitive banking. Competitive equity markets. Venture capitalists. Bankruptcy processes. Leveraged buyouts. Asset based financing. Leases. Portfolio theory. International funds flows.

Reduced barriers to international trade. Tariffs. Regulations. Lower shipping costs due to containerization. Rule of law reducing costs like letters of credit. Fax machines. Reduced foreign travel costs. Japanese supplier partner concepts.

Improved suppliers. Supplier partnerships. Supplier measures. Contracts. Supplier improvement plans. Less bidding, negotiations or transactions.

Capital allocation/investment within firms. Basic ROI/NPV education. Portfolio of products. New products, new channels, new brands, process improvements, supplier improvements. Improved supplier opportunities. Acquisition value. Improved project management and risk management.

Jack Welch view: be number 1 or 2 or else. Walmart or niche service positioning, not JC Penney or Sears or Kmart. Firms dedicated their products to what customers would willingly buy.

Benchmarking to world class standards. Belief that reaching this performance level is possible and required.

Computerization of all processes. Transactions. Planning. Scheduling. Forecasting. Controls. Budgets.

Immediate communications. Supplier transactions. Product development. Project management. Inventory management.

Digital replacement of analog publishing.

Role of network effects. Clear standards.

Internal planning and scheduling tools.

Improved current and futures markets for all commodities and business inputs.

Reduced costs for transportation, agriculture, manufacturing, minerals and standardized inputs.

Reduced construction costs through design, standardization, sourcing, project management tools.

Greatly improved hiring frameworks and tools (fill the bucket). Management development training. Employee evaluation and feedback tools.

Social support for necessary “downsizing” at larger firms during economic downturns.

Basic productivity improvements from Microsoft Office tools: spreadsheets, word processing, publishing, web publishing, forms, database structure, queries, reporting, projects, etc.

Internal planning, analysis and control tools. Activity based costing. Balanced scorecard.

Much of the productivity improvements of the last 50 years have been due to improvements in “administration”. The lean 6 sigma quality revolution points to continued improvements in the future, perhaps with a lesser measured impact.

Breakthrough improvements in chemistry, biotechnology, physics, nanotechnology, DNA, plastics, materials, communications and energy may be required to drive productivity improvements in the next 50 years.

I’m an optimist. Science delivers opportunities. Profit oriented firms in competitive market find and apply these opportunities. Output per labor hour will be 150% higher again in 2070 (5/2 X). That means that workers in 2070 will be more than 6 times as productive as those in 1970!