The Paradox of Worker Productivity, Part I

 In my recent review of the book “Abundance”, I wrote, “…government should help to improve [workers’] productivity and value to employers.”  Implicit in my thinking was that if workers became more productive, companies would hire more workers and pay them more.  A day or two later, I realized that my own career history completely contradicted that idea.

I worked for 26 years for a large corporation.  I spent about 15 years in middle management supervising professional-level employees.  Around 1990, I attended a company-wide managers’ meeting.  At that meeting, the VP of Human Resources gave a presentation laying out his vision of the future company.  At the time, the company employed about 3000 professional employees.  The HR manager said that thanks to productivity improvements, the company could be run with fewer employees and maintain the same level of production.  He said, within the decade, he expected that the company would reduce professional head-count by 2/3, to 1000 professionals.  And he added a stretch goal of reducing head-count to 300.

Employees are expensive.  Employees require salary and office space.  Employees require benefits.  Thanks to union negotiators, my company provided excellent benefits, including a pension plan, matching 401k plus excellent health insurance, which was guaranteed after retirement until age 65.  For the company, employees involve potential liability for injuries and occupational discrimination or sexual harassment lawsuits.  If an employee can be replaced by a widget, there will be potential cost savings, and my company took that as a guiding principle for four decades.  

Throughout my career, technology increased employee productivity.  Rather than creating the opportunity for more value by adding employees, technology simply meant the company could be run with fewer employees.  A manager with a PC no longer needed a secretary.  A geologist with a workstation replaced three geologists using drafting tables.  Information specialists were replaced by computer systems.  Workstations produced presentation-quality documents, so draftsmen and reprographics specialists were no longer needed.  Accountants were replaced by enterprise-wide software.  As people were replaced across the entire industry, they competed for the diminishing jobs and could be paid less.  Or at least, paid no more than before.

The same story was repeated across the whole corporate economy since 1980.  Technology means that businesses can be run with fewer employees, and fewer employees mean lower costs.  

So that is the paradox of productivity.  Technology and capital make employees more productive, but create a surplus of available employees.  Rather than creating more jobs and higher compensation, technology means lower employment and lower pay. 

The preceding paragraphs describe the American economy from 1980 to 2025.  Statistics show that employment increased at a compounded rate of 1.2% per year from 1960 – 2024, while real GDP increased at a compounded rate of 2.5%.  As noted in my blog post on “Abundance”, employee earnings have stagnated over the same period.

Conclusion
In my economics classes, it was a truism that new technologies always create new jobs as it destroys old ones.  This was the pattern of the industrial revolution and the automobile revolution.  Economist Joseph Schumpeter gave it a name: creative destruction.  But there’s no reason why this should always be so.  It’s simply an empirical observation.  Empiricism is always limited to prior experience and is not necessarily true in future circumstances.  In any event, the new jobs may not appear in a timely fashion, and workers whose jobs are eliminated may be unable to be trained for the new jobs.  

The human cost of technological disruption is real.  As a corporate manager, I survived a dozen rounds of layoffs myself, and was forced to lay off friends and long-time colleagues on more than one occasion.  

New technology enables higher worker productivity.   The paradox of higher worker productivity is that as individual workers become more valuable to the company, corporate profits rise, but workers suffer job losses and lower pay.