Do Recessions Increase Productivity?

During recent recessions, worker productivity has actually risen — but economists have been unsure if the result is driven by a changing workforce composition (i.e. more productive workers retaining their jobs) or an increase in effort and productivity on the part of individual workers. In a new paper (gated; working version here), called “Making Do With Less: Working Harder During Recessions,” economists Edward P. LazearKathryn L. Shaw, and Christopher Stanton find that it’s the latter.  Here’s the abstract:

There are two obvious possibilities that can account for the rise in productivity during recent recessions. The first is that the decline in the workforce was not random, and that the average worker was of higher quality during the recession than in the preceding period. The second is that each worker produced more while holding worker quality constant. We call the second effect, “making do with less,” that is, getting more effort from fewer workers. Using data spanning June 2006 to May 2010 on individual worker productivity from a large firm, it is possible to measure the increase in productivity due to effort and sorting. For this firm, the second effect—that workers’ effort increases—dominates the first effect—that the composition of the workforce differs over the business cycle.

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  1. Eric says:

    I would think a lot of this has to do with the remaining workers increasing their output so they aren’t the next ones laid off. Seeing your co-workers escorted out the door can have a powerful effect on your motivation to produce.

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  2. Gordon Brooks says:

    It seems to me that workers increase effort for fear of losing their jobs in times of high unemployment. This is not necessarily good for the company in the long run, as quality and morale suffer. In addition, it is unsustainable; as workers contribute more without getting additional compensation, eventually fear is not enough of an incentive.

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  3. scott says:

    Without contractual or legal constraints (union contract requiring layoffs on the basis of seniority for example), it seems reasonable that most companies will lay off people that are less productive first. This would increase the average productivity of the work force.

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    • David says:

      Yes this is specifically considered in the paper’s summary. They found that the increased QUALITY of the remaining workers was dwarfed by the increased QUANTITY of work they were pressured to do.

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    • Enter your name... says:

      I think you mean that most companies will *attempt to* lay off people that are less productive first. But it’s very hard to do this accurately in a large company, and it’s only one of several factors. You also need to maintain an appropriate mix of experience levels, keep people who have specific skills, and so forth. If all of your least-productive employees happened to be in the same department, and you laid off all of them, you might have a disaster.

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  4. David Leppik says:

    I hate when people read productivity statistics and assume that they measure productivity. They don’t. Productivity statistics use the following definition:

    Productivity = hours of work / revenue

    Thus, if Starbucks raises the price of coffee by 5%, revenue goes up by 5%, and nothing else changes, productivity has just gone up by 5%. The coffee shop isn’t actually become more efficient at serving coffee, simply at extracting money.

    The other thing productivity disregards is investments that don’t have an immediate effect on revenue. In fact, cutting R&D, ignoring customer relationships, and eliminating marketing are great ways to increase short-term productivity. These are all things that companies do when they are cash-squeezed, fixated on quarterly profits, or have lost touch with their customers. It’s like the Great Leap Forward, when Chinese farmers made miraculous productivity improvements by piling their topsoil into mounds to extract all the nutrients, while pretending the “miracle” was sustainable.

    So what it comes down to is: “productivity” numbers rarely have anything to do with how effective particular workers are at their jobs, and yet people continue to try to draw conclusions that link the two.

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    • Tim says:

      I’m sorry, but you are wrong on that.

      Productivity, broadly speaking, is outputs divided by inputs. Labour productivity = output / hours of work. So revenue isn’t a factor in the calculation of productivity.

      This is true for the data in this article too, which says: “Productivity is, therefore, the average number of transactions a worker handles in an hour, when the hour working is measured from total processing time.”

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    • leland maniloff says:

      You are spot on. For example, technological innovation is still a driver. The new prevalence in tablet and smartphones, and the correpsonding increase in tailored software, is hard to account for in this mix. Duh, but my Tablet allows me to do more, with less. So does my phone. So do virtual meetings, which were not prevalent at the beginng of this century but are today.

      Also, consider how the decrease in default in consumer and mortgage debt has caused profitibility to increase in the financial sector. That has nothing to do with individual worker productivity.

      Also, consider the effects of increase regulation on loan officer compensation. By regulating commissionable pay due to Dodd-Frank and the Loan officer compensation changes, lenders were able to increase profitablity and gross revenue.

      So, companies can become much more efficient and productive without change in the workforce.

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  5. GD says:

    Three other possibilities

    In a recession mangers are forced to redesign processes making them more efficient regardless of worker/employee reactions

    Fewer workers means the remaining staff have more access per hour/day to the capital elements of a business (plant, IT, transport) thus leveraging up the value of their labour even if effort remains level

    recession forces down prices of materials and capital allowing business to substitute it for labour where appropriate e.g. digger here becomes affordable eliminating less efficient shovel labour

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  6. Aaron says:

    This seems like it may be stemming from a known effect; the smaller the workforce, the more efficient it is and vice versa. The recession is just a novel mechanism for shrinking it.

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  7. Ted says:

    In our small company, we have been able to hire higher quality employees at a lower cost. Where we might “make do” with a decent employee who does a few things well. Now we can be much much more choosy. We are hiring folks who we would have never had the opportunity a few years back.

    So our productivity has gone up due to the higher quality of hires and their ability to bring more the job itself.

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  8. leland maniloff says:

    Or…We still have not yet seen the impact of improving technology on worker productivity.

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