The Limits of Productivity

Should a pianist be paid more if he manages to zip through a concert in half the usual time? The answer, obviously, is no, but the question is not as silly as it sounds. The pay increases that the Government allows during Phase II are supposed to be tied largely to productivity --the value of output per man-hour.

Today almost two-thirds of all U.S. workers do not manufacture products. They provide services, such as playing pianos, performing surgery, repairing dishwashers, designing packages, arresting muggers and selling and leasing almost anything. The means of gauging--much less improving--productivity in service fields are at best primitive.

This flaw in the service fields is likely to be a significant drawback in the Administration's efforts to revive the economy without inflation. Most economists, industrialists and labor leaders agree that increased productivity is the key to a high living standard, a competitive American edge in foreign markets and economic growth. For example, a mere .1% increase in productivity this year would add $1 billion to the gross national product. In the past four years, however, the rate of increase in U.S. productivity has slipped from its historic norm of about 3% a year to an average of 1.7%, well behind leading European nations and Japan. Part of the reason is the shift from a manufacturing to a service economy. Because wages have climbed much faster--8% or more in the past two years--the prices of goods and services have soared, fueling inflation.

Reversing the Process. The economy's slow recovery from last year's recession should soothe this pain somewhat. Productivity always suffers during recessions, when employers traditionally cut production faster than they lay off workers. During a recovery, the process reverses: the workers who have been kept on the payroll get more to do as sales pick up. Paul W. McCracken, chairman of the President's Council of Economic Advisers, predicts that productivity in the next year could rise as much as 4%.

Yet, there are important factors working against any productivity surge. Not least are the deep-rooted difficulties in improving output per man-hour in many service fields. Increasing the number of a doctor's patients or the size of a teacher's class could be taken as improving their "productivity," but the dilution of quality in the services they perform would probably be unacceptable.

Service industries generally have been dogged by low productivity. Between 1950 and 1970, manufacturing productivity increased by an average of 2.5% a year. While some services--notably communications and utilities--did better than that, most non-product industries did worse. Real estate, financial and insurance services posted productivity gains of about 1.8%, and business and professional services averaged about 1.2%. Last year service industries, which employ more than 60% of the work force, accounted for little more than half of the $974 billion G.N.P. Obviously, more service employees produced less than fewer manufacturing employees. As a consequence, prices in service industries rose, contributing to inflation.

Leon Greenberg, director of the National Commission on Productivity, agrees that it is difficult to improve service productivity, but contends that it is not impossible: "Housecleaning, for example, might some day be reduced by an air conditioner that absorbs dust," he says. These are long-range goals, however, and not likely to have an immediate effect. Yet despite their low productivity, service workers' pay will continue to rise in Phase II, which will tend to press up prices and weaken the drive against inflation.

Unworkable Dogma. Boosting productivity is less difficult in manufacturing, where output per man-hour is easily measured. But even in the factories, the problems are formidable. Many industries, notably steel and oil refining, are now highly automated and have to rely largely on growing demand and greater plant utilization to bring down unit costs. Changes in featherbedding work rules would help. But given labor's militant mood, this probably could be accomplished only at the cost of widespread disruptive strikes.

The implication of all these problems is that there will have to be a speedup in the pace of economic recovery to bring about an anti-inflationary rise in productivity, rather than the other way round. Says Robert Nathan, a member of TIME'S Board of Economists: "We need a hell of a big push on the economy through increased Government spending. This would lead to greater demand, lower unemployment, higher plant utilization and productivity, and give us a better chance to fight inflation." That is the reverse of traditional economic dogma, which holds that a rapid business expansion creates the danger of feeding inflation--but traditional economic dogmas do not seem to be working any more.

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