Thought Experiment – Increased Productivity

Need some help here.  I’m trying to think through some of the implications of increased productivity which is generally – if not universally – touted as a good thing.  Instinctively, I think, on balance, this has to be right.  But, there is at least one possible consequence to a business becoming more productive that seems to weigh against this argument.  I need folks to help me think this through.  Here goes:

Company A has five employees who have a fairly specialized skill set appropriate to this business.  It is able to meet the demand for the widgets it makes with these five employees but demand is not increasing despite efforts to advertise and to become more competitive.  It is also able to generate just enough revenue from the sale of these widgets to cover all of its costs, including the compensation for the employees and some business investment.  The five employees each make enough money to meet all of their basic needs with some money left over for discretionary purchases.  Company B is one who provides a service to all five employees of Company A.  At their current salaries, all five employees are able to purchase as much of the service as they need (i.e., an increase in the income of the five Company A employees will not increase the amount of the service they purchase from Company B).

Company A discovers a technological breakthrough which allows it to make more widgets with four employees (it doesn’t yet actually make more widgets since demand remains the same but the technological breakthrough gives it excess capacity so that it could make more if demand were to increase).  Therefore, Company A lays off one of the employees.  This means it can afford to pay each of the remaining four employees whatever the other employee was making, minus 1) the cost of the technology upgrade, 2) whatever additional money it wants to invest in the business, and 3) the reduction in the price it charges for widgets (presumably as a competitive move).

I think this leaves us with four employees who now have some additional money in their pockets to spend as they see fit.  It also leaves us with one employee who 1) has no money in his pocket and 2) has a fairly specialized skill set that doesn’t translate well to another job.  Somehow he is going to have to acquire the training it takes to do a different job. 

I think it also leaves Company B with one less customer as the employee who was laid off can no longer pay for its service.  And, the four employees who saw their income increase have no need for additional service from Company B.  So, Company B now sees a reduction in its income.

The customers of Company A will be able to purchase the widgets they need at a decreased price, leaving them with more money to spend elsewhere.  Perhaps, somebody in this economic loop will now have enough money to purchase the services of Company B.  But, I think this only works if the price reduction for the widgets is fairly significant, something that is not guaranteed in this scenario.

Questions:

  • Are there any assumptions built into this scenario that are incorrect?
  • Does it matter whether they lay off one of the highest paid or lowest paid employees?
  • Is it fair to say that increased productivity has not been good for the employee who was laid off?
  • Who should bear the burden of re-training the employee who was laid off? If it’s the employee who was laid off, how is he supposed to pay for that when he now has no income?
  • What other benefits to increased productivity are there?  How do they offset the negatives?
  • What else am I missing?
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6 responses to this post.

  1. Posted by Linda Brakebill on March 30, 2011 at 2:05 pm

    Even a small decrease in price for Company A’s widgets under the price of their competitors should significantly increase demand for their product, so in a relatively short time, they might again need the laid off employees skills to keep up(If he was initially laid off at all.) If not, the increased available discretionary $’s available to both Company A’s employees and their customers should increase demand for other goods and services – hopefully the employee who was laid off will be able to find employment in one of those areas. I would assume that the most essential employees to Company A would not include the one let go – it would be the least essential, and probably the least skilled, and therefore, the skill sets which that employee possessed should translate more easily to another industry. ( I guess my assumption could be flawed depending on what that technological breakthrough was — it could have done away with the necessity for some highly skilled, complex contribution to the process, and therefore a higher level, less adaptable employee).

    Reply

    • Thanks for weighing in, Linda. Looks like you’ve got extra time on your hands, too!

      How about if this employee who is laid off has acquired specialized and relatively non-transferrable skills? As we become more and more specialized (not to mention more and more technically-sophisticated), isn’t it more difficult for employees who find their skills have been made obsolete for whatever reason (but likely because of technological advancements) to transition into a new career field?

      What I’m really trying to do is think through a situation in which we have an employee who is clearly worse off because of productivity and whose options for finding equivalent employment are very slim. In such an instance, how is increased productivity a positive? At least part of the answer has to be the benefit to the consumers who are receiving their widgets (or the products of which the widgets are a component) at a lower price thereby increasing their disposable income. Depending on 1) whether that increase in disposable income is enough to do something with, 2) whether there are enough consumers who are benefiting from that increase in disposable income, and 3) how they choose to spend that disposable income, the increase in productivity will likely lead to enhancements in existing products/services or the creation of new products/services that these consumers would demand.

      I still think we’ve got a problem with that employee who has no income and whose skills are obsolete. And, we’ve got another company (B) who has lost business as a result of A’s increase in productivity (this may only be temporary since presumably Company B would gain the business back when the laid-off employee starts bringing in enough income to afford Company B’s service).

      Reply

      • Posted by Linda Brakebill on March 31, 2011 at 1:22 am

        I think that has always been a problem in the workforce – progress and change often have down sides and even casualties – brakemen on trains, telegraph and elevator operators, pony express riders……..and many more in all types of manufacturing when automated machinery, laser processes, and technology of all sorts have replaced the need for human labor and expertise. Is your real question who is responsible for finding that displaced person a new job and/or providing them with training/education for them to be able to get a new job? I may be a little hard-hearted, but I think first and foremost that responsibility falls on the displaced individual. If Company A can afford to give more than customary severance pay, or chooses to offer to assist w/ retraining or education, that is great, but I would not necessarily think it was their responsibility, anymore than it is an education institution’s responsibility to offer a redo for graduates who pursue a particular degree, then upon graduation find there is a glut of others trained in that field or for other reasons cannot find a job in that field. I believe individuals make choices and have responsibilities to look at where those choices may be leading and to plan accordingly. I know some RD employees who are taking courses in other fields which could prepare them for a totally different career if the need or opportunity presented itself. As long as an employee is paid for the work which they perform, are treated fairly and according to any contractual agreements which they have made with their employer, I don’t think there is a permanent responsibility of an employer to that employee to see they have another job when their employment ends. A good employer who had respect and gratitude for a good employee’s service if that employee could not be kept on, and had the financial ability to assist that former employee in any way might feel a moral responsibility to do so and again, that would be great.

        I think Universities, Trade Schools, and even High Schools should be looking at workforce needs and possible/probable changes and preparing students for the future needs and I think they try to do so (i.e. the wind technician and higher level degree programs in that field popping up all over our region – (1st TSTC at Sweetwater, followed by South Plains College, WTAMU, and Texas Tech).

        (Also, Company A was a pretty small company to be expected to have the resources to retrain the even the one employee, though I realize the this was just an example and the small number was just to try to simplify.)

        (My husband had the exact same comment as Allen !)

  2. Posted by Linda Brakebill on March 31, 2011 at 2:00 am

    A couple of more examples – My cousin, in the 70’s -early 80’s was a typewriter repairman – sort of apprenticed under an older fellow and took over when he retired- today he has a software company and does some web design both from home and is self taught and quite successful because when his other occupation and need for those skills dwindled, he was looking down the road and planning accordingly and adjusted to the times.

    Another would be changes in Farm Labor Housing. When pre-emergent herbicides and bigger better harvesting equipment came along, greatly decreasing the need for many migrant, seasonal farm laborers in this and many areas, the farm labor housing which had been designed with flexible sized units and as temporary quarters suffered and many failed. As many of these properties have been redesigned with fewer, larger units for year round occupancy which better suits the smaller number but more permanent laborers now working in the area on dairies, etc. That also caused the changes in the regulation to broaden the definition of farm labor. That is growing pains and adaptation to ease them. Not always swift enough, but they happen.

    Reply

  3. Who is responsible is only one component of my question. And, to that end, I don’t believe Company A – no matter how large it is – has any responsibility to retrain the employee. Company A’s responsibility is to maximize profits for its shareholders. Like you, I think the answer as to who is responsible is the individual. But, I also recognize that it may not be possible for the individual who finds himself in this situation to get the training without someone’s assistance.

    My effort here is really an attempt to understand all of the pieces of the cost-benefit analysis of increased productivity. In my head, I see this as a set of scales.

    On the benefits side:

    1. Company A – increased profits
    2. 4 Company A employees – increased disposable income
    3. Company A’s customers – decreased cost for widgets, increased disposable income
    4. Companies who have new or increased business from the 4 Company A employees and/or Company A’s customers b/c of their increased disposable income

    On the cost side:

    1. Laid off employee – lost income
    2. Company B – decreased income (there may be several “Company B’s”)
    3. Taxpayers – increased taxes (to pay for: 1) retraining, 2) unemployment benefits, and/or 3) other welfare-type programs)

    If #2 and #3 on the benefits side are small, then #4 on the benefits side will be small. #1 on the cost side will still be high; #2 on the cost side is probably still high, too. In that case, is increased productivity still a good thing?

    You’re point about all of these historical examples are well-taken. Does the fact that we’re advancing much more rapidly change anything? Historically, it seems that most people had a reasonable expectation that they would be able to work in one field for their entire career (that probably made the disruptive technological change even more dramatic). Today, isn’t it significantly less reasonable to expect that most people will be able to stay in the same field because the rate of change is happening so much faster?

    Reply

  4. Posted by Linda Brakebill on March 31, 2011 at 8:47 am

    Everything moves faster nowadays. And Job/career changes have increased drastically. but the company B’s too have better tools to read their market, to anticipate or predict market changes, and to make responsive changes to it. if they use them. ( Perhaps Company B can enhance its product or service to attract more dollars from its smaller in number, but better paid customers at Company A)

    I have to believe that in the long run, increased productivity or efficiency is a good thing in any case. Even if Company A ends up forcing its competitors out of the business( Or some competitors
    merge and buy out Company A and further reduce the workforce in making that particular widget.) Increased profits would then be available to produce or develop something else – which is how all these advancements have occurred so quickly.

    Another point of view was presented to me when trying to work with a tribe and BIA on a project once (Which you undoubtedly have much more experience with than me.) They told me and our engineer that they did not want to build the project to be the most efficient and cost effective – they could get all the money they needed to build whatever they wanted – they wanted the project to create and retain the most jobs on the reservation long term.

    Reply

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