American Productivity; SQUEE-E-E-ZING MORE FROM INDUSTRY
Corporate executives in the US are trying to pick up the pace in their productivity race with other nations.
Productivity growth - the increase in goods produced per hour of work - slowed to a crawl in the United States during the 1970s as Japan, France, and Germany posted gains in efficiency more than twice as large as US industry.
Seeing their competitive position erode, executives at hundreds of companies are taking steps to boost productivity. For example:
* Intel Corporation has cut the the steps required to hire a new employee by one-third and trimmed the actions needed to order office supplies from as many as 95 down to 8. As a result, the company has already pocketed savings in excess of $10 million.
* Westinghouse Electric Corporation used computer design equipment to cut from 11 hours to 45 minutes the time it takes to design and make a generator part.
* Norton Company sought employee advice and found ways to cut the reject rate at its glass ceramics operation from 15 percent to 6 percent and got back almost
However, despite renewed productivity improvement efforts by corporations, US productivity in the next few years is not expected to grow as rapidly as it did from World War II to 1973, economists say.
Virtually everyone has a stake in productivity growth. Productivity is, in effect, a recipe that tells how much of a given product or service can be produced with one ingredient like labor or with a mix of ingredients including labor, energy, and machinery. The more cars General Motors can turn out using one hour of labor, for instance, the more productive and better off GM - and eventually its workers - will be.
That is because a corporation or a country that boasts higher productivity than its competitors has two appealing options. For instance, if Toyota has a higher productivity level than GM, Toyota can afford to ''buy'' a bigger share of a given market by selling at a lower price than GM. Or it can sell its products at the same price as its Detroit-based opponent and pocket fatter profits.
Improving productivity is thus a major avenue to healthier corporations and more prosperous countries. ''Productivity growth represents the best way to secure and improve . . . living standards,'' says Walter Dolde, senior economist at A. Gary Shilling & Co., an economics consulting firm.
The higher a nation's level of productivity, the larger the quantity of goods and services it can produce with a given quantity of labor, capital, or energy. Thus, a high level of productivity can increase the size of the economic pie citizens share.
For example, if productivity in the US continues to grow at the 0.6 percent average annual rate experienced since 1973, real household income in the US could amount to $26,700 by 1990, Mr. Dolde calculates. But if productivity growth zipped along at the 2.6 percent average annual growth rate posted between 1960 and 1973, average household income would be $37,600, or $10,900 higher.
That is why the slowdown in US productivity growth is a cause for concern. The rate of growth declined after the quadrupling of oil prices in 1973 and '74 and was negative from 1978 to '80. As a result of a brief economic recovery in early 1981, productivity growth spurted 4.9 percent in the first quarter before turning negative for the rest of the year. The 1.4 percent increase in nonfarm productivity during 1981 was only about half the average rate achieved between 1960 and 1973.
So far this year, productivity growth has been in the 0.5 to 0.6 percent range. ''The only factor which has contributed to higher productivity is higher unemployment . . . ,'' says Jerry Jasinowski, senior vice-president and chief economist at the National Association of Manufacturers. Because productivity is a ratio of output to input, it will rise when output or GNP is stagnant and the use of labor falls as a result of unemployment.
For 1982 as a whole, Data Resources Inc. economist Robert Gough expects productivity growth to be only about 0.5 percent. Others, including Wharton Econometric Associates, expect a decline in productivity growth of 0.7 percent. Until the economy rebounds, businesses do not have the cash to spend on new capital equipment. And they are not anxious to spend anyway, since there is excess capacity at many existing plants.
Later in the decade, productivity is expected to rebound as the economy improves. In the years from 1981 through 1986, Citibank economists think productivity growth will average 1.5 percent a year. The acceleration combines some increases that normally occur as an economy recovers and some strengthening in the long-term productivity trend as the labor force becomes more experienced and energy prices stablize.
''There will be a reversal, but it will be a slowly emerging trend. I don't see a dramatic turnaround,'' says C. Jackson Grayson, chairman of the American Productivity Center in Houston.
Macroeconomic factors such as change in energy prices or the level of capital investment played a major role in causing the downturn in US productivity and help explain why a return to post-World War II productivity levels is not expected.
Together, the factors help explain a reduction in the average annual rate of productivity growth. It had been about at the 3.2 percent level from the end of World War II to 1969. Since 1975 the rate, adjusted for economic cycles, has been ''essentially flat,'' Mr. Jasinowski says.
He cites five villains including:
1. Increases in relative energy prices. Higher energy prices caused business to substitute labor for more expensive energy, thus reducing output per hour of work, the most common productivity measure. At the same time, the emphasis in investment shifted from machines that boost labor productivity to those that were energy efficent.
2. A decline in capital investment. With business profits under pressure from inflation, the real net growth in the stock of capital equipment or factories and machinery used to make goods fell from an average 5.72 percent annually in the period 1965-69 to 3.23 percent between 1974 and 1979. That meant that less productivity-boosting equipment was available to workers.
3. Increases in regulatory costs. Environmental regulation of the 1960s had its most pronounced economic effects in the last 10 years, Jasinowski contends. As a result, funds that went into achieving compliance with federal regulations could not be used to purchase equipment to make workers more productive.
4. Changes in the demographic mix of the labor force. As a result of the baby boom of the 1940s and 1950s, the work force of the '70s had many more young workers with relatively low skill levels. The result was to reduce productivity growth.
5. Changes in the mix of goods produced from manufacturing to services. The economy's shift from a manufacturing to a service orientation tends to depress productivity growth. That is because manufacturing operations such as auto plants are more capital intensive and can produce faster productivity growth than can more labor intensive service industries such as restaurants.
''Any hope for the restoration of an upward productivity trend, except as a possible result of good luck, must depend mainly on business,'' says Brookings Institution senior fellow Edward F. Denison.
There are three key ways to increase worker productivity. The first is to make workers more proficient by giving them more training. A second option is to make the money invested in plant and equipment more efficent through machine improvements and better design of manufacturing processes. Finally, a firm can increase its labor productivity by investing in more machinery per worker.
Usually when economists refer to productivity they are referring to the relationship between goods produced and labor hours used. However, more attention now is being given to measuring how productively the economy and individual firms use capital, material, and energy as well. Both TRW Inc. and General Electric Company are using expanded productivity measures. Next year the the Bureau of Labor Statistics is slated to begin publishing an index that spotlights the role of nonlabor factors.
In the past, systematic productivity improvement has not been as high a priority for most managers. Arnold S. Judson, chairman of Gray-Judson, a Boston-based consulting company, found this to be the case in a survey of 195 major companies published in the September issue of the Harvard Business Review.
In the survey, the executives admitted the most important cause of declining productivity growth in the US was managers' ineffectiveness in addressing problems in their firms, as well as excessive concern with short-term results.
The managers were highly critical of their own productivity-improvement programs. They labeled them as being narrow in scope and focused on only selected parts of the organization. Often, the managers said, the programs are aimed at symptoms - like high scrap rates - rather than at underlying causes. Most of the managers said their productivity program was geared to quick fixes and had a time horizon of a year or less.
''It is unfair'' to blame US productivity problems largely on managers, counters Jack Fooks, deputy director of Westinghouse Electric Corporation's Productivity and Quality Center. ''But managers did not recognize early enough they were in a world market'' and could not simply pass along escalating costs.
Even Mr. Judson sees signs of progress. Managers are ''a lot more conscious of productivity than they were five years ago,'' he said in an interview. ''The flip side is that often they are still hungry for a quick fix.''
Many of the managers Judson talked to were exploring quality of work life (QWL) programs as a promising way to boost productivity. QWL plans involve workers in identifying and solving problems in the workplace. Often workers point out solutions to manufacturing bottlenecks which managers have ignored. And participation also improves morale and thus productivity and quality.
Consultant Judson claims that a thoughtfully conceived and operated QWL plan can boost productivity by between 20 and 40 percent. The human factors these groups address ''are responsible for 29 percent of all productivity growth,'' notes Work in America Institute president Jerome M. Rosow.
In addition to corporate efforts to boost productivity, government is trying to lend a hand. For example, last November President Reagan formed a National Productivity Advisory Committee composed of corporate executives as well as labor and academic representatives. It has largely confined itself to pushing for passage of administration-backed legislative proposals aimed at helping business. For instance, it has endorsed a rollback of the automobile emission standards in the Clean Air Act as well as commercialization of inventions from government contracts.
While managers say change in government policies could provide some help, achieving faster productivity growth will depend to a large extent on managers being more savvy. ''We haven't discovered anything revolutionary (to boost productivity). What is needed is to put into practice all we know,'' says Productivity Center chairman Grayson.