Caterpillar: Productivity in Recession

Caterpillar: Productivity in Recession: I recently heard a pod cast from Econtalk, ‘Ohanian on the Great Recession and the Labor Market’. The host is Russ Roberts and the guest i...

Productivity in Recession

I recently heard a pod cast from Econtalk, ‘Ohanian on the Great Recession and the Labor Market’. The host is Russ Roberts and the guest is Lee Ohanian. The related pod cast link is here: http://www.econtalk.org/archives/2012/08/ohanian_on_the.html. In this podcast, it mentioned that in the past recessions before this GFC, the US’s productivity and employment both decreased, whereas this GFC makes the US experience increasing productivity and decreasing employment. They didn’t get into too much detail about this subject, which I was pondering for a while. Now I am going to share my personal theory on this subject with you.

Let’s put this GFC aside and focus on the past recessions for a moment. In a typical economic recession, market demand in some/all industries is close to saturation. Under such circumstances, business has a number of options:

1.  Finding a new business opportunity in a new industry

2. Introducing a new product/technology to the existing business

3. Decreasing the price of the existing products and doing clearance sales, considering the relative storage and maintenance cost

4. Conducting retrenchment and laying off employees

The first two options are intangible-asset-related work. It is very hard to measure the productivity in this sort of work. There is a great deal of exploration/ trial-and-error work involved.  Moreover, assuming the new technology is existent already, it is also hard to measure the productivity of adding business value to this new technology. When I say adding business value to a new patent/technology, I am referring to:

1.  Making this technology economical viable

2. Making the customers understand the value of this new-technology-related product

3. Creating the legislation related to this product

4. Making the industries related to this new technology economical viable

I would like to explain the last point in more detail. Let’s say you develop a new machine that makes metal faster and better. The related industries to this new machine may include:

a.       The manufacturing factories that produce this machine and may need to upgrade their system to produce it

b.      The training programs that train workers to operate this machine and/or operate the upgraded system mentioned in Point a

c.       The electricity supplier that may need to upgrade their machine to adapt to this new machine and so on

All of these are intangible-asset-related work and it’s not easy to measure the productivity of this work.  Though I haven’t had a chance to have a look at the productivity data mentioned in the podcast, I believe neglecting this intangible-asset-related work will make productivity underestimated, as it is hard to measure it especially when the business value of this intangible-asset-related work is not realised yet.

As I said before, the business can also reduce the price and do sales on their existing products. This may suggest that the same number of sales people may sell fewer products in recession given the market demand is weak. This also means that the productivity decreases.

In light of retrenchment, the story is not as purely simple as it seems. Although layoff means that the labour market is weak, from the productivity point of view, however, the answer is complicated. In theory, workers without sufficient training or updated knowledge will not get hired, whilst the new technology brings in better products in a more efficient manner. Empirically, the process of retrenchment and restructure is a process of political operation, which may include:

1.       Negotiation with the union

2.       Establishing new business network if the new business opportunity/ technology requires relocation across countries/industries

3.       Rebalancing the political power given the new source introduced by the new technology getting into the business

None of these are tangible-asset-related work. How can it be measured in terms of input versus output? What I am trying to explain here is that there is more intangible-asset-related work in recession than that in booming economy. Neglecting this makes productivity underestimated. If it’s true that the US’s productivity doesn’t decrease in this recession, how can you explain it? My opinion is that the US is going off the recession. They are realising or have realised the business value of this intangible-asset-related work already, so it can be seen that their productivity increases and employment is still an issue as they are too good in getting work done to hire more people.

In the end, I would like to thank Eugene Dubossarsky for listening to my idea and encouraging me to post it to my blog.