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.


Eric

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.

Gordon Brooks

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.

scott

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.

David

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.

David Leppik

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.

Read more...

Tim

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."

GD

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

Aaron

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.

Ted

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.

leland maniloff

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

Eric Pulsifer

Would have to say yes. At least productivity per worker has increased. What with budgetary concerns, some positions have been eliminated and others merged. The worker finds himself doing the work of maybe one-and-a-half or two workers while the pay remains the same.

What's interesting is that companies can survive just fine on a skeleton crew and will be slow to staff up after a recession. Maybe that's a reason why employment recovery is so slow, yes?

Anita

It just reminds me of what my former boss told us when it became obvious that it was going to be a very serious recession (he was around 60 at that time):
"You know, I`ve already experienced quite a few recessions in my life, and I survived all of them. And we`re going to survive this one too. The secret is simple: you have to work harder, longer, for less."
And this explains everything.