Jobs and Productivity

Jack Welch, the erstwhile CEO of General Electric (GE) made big news when he said the jobs lost in the recession were not coming back. He said, businesses have learned to do more with less and that the investment in Information Technology (IT) over the past few decades was paying off. In essence, he was saying that increased efficiencies and productivity meant that American businesses were capable of producing the same levels of output with a reduced workforce.

This can be depressing news to everyone from the President to the worker that got laid off. However, a recent McKinsey study indicates that increased productivity does not mean lost jobs. To quote from the study:

“Does higher productivity destroy jobs? Sometimes, but only in the very short term, considering US economic performance over the past 80 years. In fact, every ten-year rolling period but one since 1929 has seen increases in both U.S. productivity and employment. Even on a rolling annual basis, 69 percent of periods have delivered both productivity and jobs growth (Exhibit 1). Over the long term, apparently, it’s a fallacy to suggest that there’s a trade-off between unemployment and productivity.”

This is because the foundation of productivity is innovation. Innovation in products, processes and technologies means that a business can make more widgets for less cost and the end customer gets more bang for their buck. Nobody would argue against that. One has to just look at the world of electronics to see that. Every month, there are newer, faster, fancier products and often they cost less than their obsolete predecessor. Today I could buy a laptop at 30 percent of the cost I paid for this laptop, on which I type this article, four years ago. This new laptop would be four times faster, have four  times more memory and eight times more disk space. When these customers now save money, they can actually spend that money buying more widgets which essentially spurs the economy.

So what happens to the worker that lost his or her job? What do they do now? In a dynamic, free market economy such as ours anybody needs to be ready to retrain and re-align themselves. The rate of change is so fast that what was great last decade is not this decade. Soon we will be talking years instead of a decade. The time frames for innovation cycles are getting shorter and shorter. The smart worker will constantly endeavor to do two things 1) stay on the leading edge of their profession, and 2) be on the lookout for new trades or skills they can learn and develop. Taking an airplane metaphor one must be ready not just to climb but also to sideslip.

This applies equally to businesses. A recent example being Borders which had to shut many brick and mortar stores because they persisted with just book stores and never caught on to the internet and the Amazon wave.