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Management & Trends Laid-Off Workers Hardly Missed Dan Ackman,, 09.06.01, 9:00 AM ET

NEW YORK - The bad news is that businesses have been cutting hundreds of thousands of workers. The good news is most of those laid-off were slackers.

This is the import of revised government data showing that the productivity of U.S. workers increased by a healthy 2.1% in the second quarter. The numbers released yesterday by the Department of Labor were revised downward from an earlier estimate of 2.5%

Productivity is simply the total economic output divided by the number of hours worked. In the second quarter, nonfarm business output actually declined slightly by 0.5% compared to the previous quarter. But workers put in 2.6% fewer hours. Thus the pop in productivity.

The second quarter was the first time that business sector output actually fell since 1993, the tail end of the last recession. The fact that output declined much less sharply than hours worked indicates one of two things: Either workers still on the job intensified their efforts--perhaps out of fear that they might be next--or workers let go were spending a lot of time chasing their own tales. Perhaps it was a little of both.

Many layoffs occurred in the now moribund dot-com sector. Workers in that industry were famously dedicated: Stories of entrepreneurs sleeping in their offices and undergoing miles of grueling business travel were legion. But the fact is that many of dot-com firms weren't producing very much of anything. They were busy doing nothing. They were drains.

Productivity is often said to be a key measure or determinant of living standards--and in the long run, it is. But in the short run, productivity varies more with output as dictated by business conditions than it does with changes in technology or effort. That business can get the same or nearly the same product with fewer workers suggests that the job cuts were well-conceived, however painful.

Productivity gains this quarter were caused by a decline in the number of hours worked across the board. Hours declined 2.6% in the nonfarm business sector and 5.8% in manufacturing. Yet output dipped just slightly overall.

In manufacturing, output fell by 4.8%. But hours declined by even more, 5.8%. The result was a 1.1% rise in productivity, revised from a previously reported drop of 0.2%. "Output and hours in manufacturing, which includes about 16% of U.S. business-sector employment, tend to vary more from quarter to quarter than data [from others sectors,]" the Labor Department said.

Harder-working workers were rewarded for their efforts. Hourly compensation increased sharply for the second quarter in a row. Real hourly compensation (adjusted for inflation and including some benefits as well as pay) was up 2.2% in the second quarter and increased 3.1% from a year ago.

The gross domestic product, the broadest measure of economic output, advanced at the trickling annual rate of 0.2% in the second quarter--its slowest growth in eight years. The downward revision in productivity reflects a recent downward revision in the rate of GDP growth.

"Firms have done a really good job at cutting hours as demand lessened," said Vince Boberski, an economist at Dain Rauscher, reacting to the unrevised numbers issued earlier. The net result is a return to productivity growth that is in line with the '90s expansion, though not quite as high as the best quarters during that era.

From 1973 to 1995, productivity averaged paltry gains of just above 1% annually. Since 1995, 2%-or-better quarterly increases have become routine. These gains have given rise to a debate over whether there is a business "new economy" that is structurally more productive due to technological gain or whether strong conditions simply caused firms to push workers harder.

Better productivity numbers, even in a downturn, suggest without proving that lasting changes were indeed at work.

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