Why Pink Slips Don't Necessarily Add Up To Productivity Hikes

Although the U.S. expansion is three years old and going strong, many businesses are still paring their employment rolls. Challenger Gray & Christmas Inc., an executive recruitment firm, reports that its tally of planned layoffs by big U.S. companies is up 18% so far this year. Meanwhile, the downsizing trend has spread to Europe and Japan.

The rationale for such job-pruning, of course, is that it pays off in productivity gains. And the often-cited proof is the performance of the U.S. manufacturing sector, which boosted its output per worker by a healthy 33% from 1977 to 1987, while cutting employees by 4.5%. Because U.S. industry bit the bullet on job cutbacks, so the story goes, it is now lean and mean and better able to compete in global markets.

Inspiring as this saga is, a National Bureau of Economic Research analysis of over 250,000 manufacturing plants by Martin Neil Baily, Eric J. Bartelsman, and John Haltiwanger suggests that it is oversimplified. Downsizing has been less pervasive than commonly believed, the study finds, and its productivity-enhancing role has been exaggerated.

It's true, for example, that the number of workers in the average manufacturing plant fell from 58 in 1977 to less than 50 in 1987. But this average is deceiving. Much of the factory workforce in 1987 worked in very large plants, which grew significantly in the 1980s. In fact, the typical worker in that year was employed in a plant with over 1,700 workers--about 10% more than in 1977.

What's more, the net employment decline over the decade appears to have occurred mainly because jobs lost via plant closures were not fully offset by jobs created at new facilities. The job loss among the 140,000 plants that operated from 1977 to 1987 was marginal.

In this latter group, of course, a large number did downsize and post healthy productivity gains. But even more plants (including many of the largest facilities) managed to raise output per worker while expanding employment, and they contributed about as much to overall productivity increases during the 1980s as the successful downsizers.

A large number of establishments also experienced productivity declines, including some that downsized and some that expanded their payrolls. In other words, downsizing and productivity gains were far from synonymous during the 1980s. As in prior decades, many companies found they were able to boost jobs and productivity at the same time.

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