Measuring gains and growing pains
By Kevin Parker, editorial director -- Manufacturing Business Technology, 9/1/2005 6:00:00 AM
No matter what kind of gain in manufacturing you're talking about—increased throughput, reduced inventory, or something less tangible—at the end of the day, it should be expressed as a productivity gain, an increase in output per hours worked.
Productivity improvement is critical to raising the living standards of Americans. That's because when a company improves productivity, it has two options available to it. It can raise the wages of workers, or it can decrease the costs of goods, making them available to a wider range of people than ever before.
The U.S. has experienced quite remarkable productivity growth for almost a decade now. And the performance of U.S. manufacturing has been even more outstanding: nearly 5 percent a year since 2000, although it has more recently wavered some.
But it hasn't always been this way, and productivity growth has taken some interesting twists and turns over the last 50 years. Coming out of WWII, the U.S. saw sizeable productivity gains of almost 3 percent from 1948 until 1973, when it slowed in the wake of a number of shocks to our economy, to 1.5 percent for the next 22 years.
The question is, what changed in the mid-1990s?
Today there is consensus that increased productivity growth beginning in the mid-1990s can be attributed to widespread use of information technology. But until recently, there was considerable controversy around this topic, with Nobel Prize-winning economist Robert Solow coining the famous phrase that computers could be found everywhere but in the productivity statistics.
And questions remain: Why did it take so long for benefits to manifest themselves? After all, computerization has been going on for 20 years at least. One possible answer might be that business processes needed time to catch up with the new technologies. It might not have been clear at first how business processes needed to change to take best advantage of the new technologies. Studies of the great technology breakthroughs of the 19th century, including the telegraph and railroads, seem to back this up.
Another objection is that other industrialized nations, most notably in Europe, aren't seeing the same productivity gains as the U.S., even though levels of computerization are roughly the same. Long distances, a single language, and laissez-faire capitalism may go a long way in explaining why the U.S. has seen gains Europe has not. (This productivity gap itself may become a problem as Europe becomes less able to buy U.S. goods.)
Finally, others point out that productivity gains in the U.S. may in fact be understated. For one thing, it's hard to measure the overall effects of computerization because everyone is doing it at the same time. And it may not make sense to compare the work it took to build an automobile 20 years ago with that required for today's models. Cars today are so much better than they were in the past. They don't break down as often, they're easier to use and maintain, they're equipped with special features, and they're loaded with microprocessors and software.
The net sum of all this productivity growth is that while manufacturing's share of the labor force has fallen, the total output of U.S. manufacturing as a percentage of the U.S. economy has remained much more constant.
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