In bargaining, buyers should play the productivity card
By Daniel W. Gottlieb -- Purchasing, 3/23/2000
In fighting the massive wave of commodity price in-creases, linked to rising raw materials and employment costs, industrial buyers should play the productivity card--before it's too late. While input costs may be rising for producers, there's still plenty of evidence to suggest that many are managing--through productivity growth--to keep profits intact, making many price increases unnecessary.In its simplest form, productivity is the ratio of output to the number of hours worked. Admittedly, it's an elusive concept to measure. It's difficult to decide, for example, whether output should be measured in units or according to the dollar value of goods and services produced. The problem is even stickier in an economy increasingly driven by services. For example, how does one measure the output of a help desk operator? By phone calls answered? Computer crashes fixed?
Brookings Institute economists Jack Triplett and Barry Bosworth (a former economic adviser to President Jimmy Carter) recently published an article on measuring productivity in the services sector at the Brookings web site. They write: "The science of economics is no closer to developing methods for measuring the output of economists' own activities than it is for measuring the output of banks, law firms, and insurance agents."
Economists have explored a number of methods for measuring productivity, attempting to show what factors contribute how much to increased output. Examples of these factors include better-trained workers, better equipment, and applications of new technologies. To reflect these factors, the Bureau of Labor Statistics produces a "multifactor productivity" index. Unfortunately, the data for this series stops at 1996 and won't be updated until this summer, according to BLS productivity analyst Mike Harper.
Despite this lack of multi-factor data, buyers may still want to investigate their suppliers' individual productivity growth trends, against the backdrop of macro data on productivity. Data from the BLS (see charts) shows that growth in manufacturing productivity from 1998 to 1999 more than doubled gains for the nonfarm business sector as a whole. What's more, the 6.4% increase recorded in 1999 was the largest since 1971 (6.9%). The data show also that, on average, manufacturing unit labor costs have been declining, albeit less rapidly due to the fact that benefits (such as health insurance) now account for larger portions of total workers' compensation.
Part of the productivity growth achieved since 1995 can be linked to a faster rate of increase in the amount of capital per worker, according to the Federal Reserve Board's semi-annual report to Congress. "Beyond that, the causes are more difficult to pin down quantitatively." the Fed says. They seem to be related to increased technological and organizational efficiencies. Firms are expanding capital investment and discovering new uses for the technologies embodied in capital. What's more, workers are becoming more skilled at employing new technologies.
The $6 million question is whether these same factors will persist in driving big productivity growth in 2000 and beyond. On one hand, says Fed chairman Alan Greenspan, there's evidence to suggest the trend can't continue indefinitely. Negatives, according to Greenspan, include labor shortages and possible future capital shortages. On the other hand, he sees factors that could cause productivity growth to accelerate. "We still may be in the earlier stages of the rapid adoption of new technologies and not yet in sight of the stage when this wave of innovation will crest."
The weight of "Greenspeak" and the bunching of Fed interest rate hikes suggest the central bank will continue to slow the economy before labor and capital shortages can precipitate a nosedive. This slowing trend may be emphasized as rising prosperity abroad, while helping U.S. exports, could draw away some of the capital currently fueling the U.S. expansion. When the economy slows, the subsequent slowdown in output will cause the government's simple productivity growth measures to slow as well, making it more difficult for buyers to fight producers' cost-related price increase attempts.
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