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The Productivity Dilemma

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The U.S. productivity gains of the 1990s did more to raise worker wages than corporate profits, according to a recent analysis in BusinessWeek magazine. This may prove to be a dilemma for employers if the labor market tightens up again in an economic recovery.

From March 1991 to December 2001, real wage gains for private-sector employees rose by an average of 1.3% annually, though the big increases occurred between 1998 and 2001. That figure compares with just .2% annual wage growth during the business cycle that ran its course in the 1980s. During the 1991 to 2001 period, productivity rose by an average of 2.2% annually, half a percentage point higher than in the 1980s.

BusinessWeek has calculated that "workers received 99% of the gains from faster productivity growth in the 1990s at nonfinancial corporations." The rise in corporate profits, meanwhile, was due more to lower interest rates than high productivity. Starting in 1998, U.S. unit labor costs began a steep climb despite productivity growth, according to figures from the Bureau of Labor Statistics. In 1997, unit labor costs went up 0.9%. By comparison, in 1998, they rose 2.7%, in 1999 2%, in 2000 3.1% and in 2001 3.8%. At almost 87% of the output of nonfinancial corporations, labor costs have been at a historic high.

For employers, this isn't entirely bad news. Strong wage growth kept consumer spending robust even during the downturn. And the fact that productivity is rewarded with wage growth, as economic theory assumes, sends a positive message to workers. It also encourages a more highly skilled workforce, with the highest wages going to the most-educated people. U.S. employees have been getting this message. Slightly over half (51%) of U.S. adults have some college education, up from just a third in 1982. And young people, in particular, are convinced that they need more of an education in order to achieve the American Dream. In 2000, fully 58% of people 25 to 34 years old had some college education, up from 45% as recently as 1991.

Considering that productivity rates have continued to rise – along with education rates and the application of new technologies – there's a chance that both corporations and their workers will profit from these trends in the near future. In fact, things may already be turning around for companies. In the fourth quarter of 2001, output per hour rose by a stunning 5.2% even as unit labor costs shrank by 2.7%.

On the other hand, there's also a chance that rising wages in a tightening labor market could eat too far into profits when the economy gets into full swing. In that case, many employers might continue their layoffs to raise their shareholders' returns. Not only might this send negative signals to workers, it could kill consumer spending, which so far has been driving the economic recovery.

These trends present some tough dilemmas for HR and top management. How do they ensure that productivity gains are fairly shared between shareholders and employees? Even as healthcare costs rise at double-digit rates, how do they control compensation costs while hiring, retaining and motivating the workers they need for competitive success?

The answers won't come easily. They may range from communication plans, such as forms of open-book management, to compensation plans, such as profitsharing, to new benefit programs, such as consumer-driven healthcare strategies. If profits are being squeezed, employers will need to find ways of motivating and rewarding workers without raising labor costs to unsustainable levels.

On a positive note, these are the types of trends that demand excellent analytical skills and creative problem-solving. If HR professionals can help their employers successfully cope with their dilemmas, they will have done much to earn the strategic thinker hat that they've been trying on in recent years.


BusinessWeek's "Restating the '90s" can be found at

http://www.businessweek.com/magazine/content/02_13/b3776001.htm

Government data on productivity and costs can be found at

http://www.bls.gov/lpc/home.htm

A graph on annual pay increases from 1990 to 2000 is at

http://www.bls.gov/opub/ted/2001/Sept/wk2/art03.htm

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