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Productivity down, costs down?

At the broad economic level, it is difficult to imagine a situation where a decline in productivity would lead to an increase in profit. If other variables are kept constant, as is often done in economic discourse, lower productivity would raise costs and, because competition keeps prices from rising, profits would therefore be lower. Richard B. Freeman and Morris M. Kleiner in their recent article, "The last American shoe manufacturers: Decreasing pro-productivity and increasing profits in the shift from piece rates to continuous flow production," in the latest Industrial Relations, say that even when changes in human resource management that have a clear impact on productivity are implemented, they often come as part of a broader package of changes. They write, "The attempt to isolate a particular human resource fails to capture that changes in a particular policy occur not on a ceteris paribus basis, but mutatis mutandis in conjunction with many other practices within the firm."

Freeman and Kleiner examine the case of a large American shoe manufacturer that had traditionally used a piece-rate compensation policy for most of its shop floor employees. As Freeman and Kleiner document, many analysts agree that piece-rate compensation induces greater productive effort than does time-rate compensation. There are, however, things that have to be watched for--workers might skimp on quality or use excessive material to make a higher production number. This leads to constructing a costly quality control and inspection apparatus--an apparatus that is not counted as part of the shop floor head count upon which productivity is assessed.

In any case, after the manufacturer made the difficult and contentious switch from piece rates to time rates, they did, in fact, find that productivity fell. However, the reduced cost of quality assurance, reduced aggregate wage costs, greater flexibility of production, and reduced materials wastage, and even reduced workers' compensation costs, more than made up for the drop in individual productivity. As Freeman and Kleiner conclude, "Our within firm analysis shows that the higher productivity associated with piece rate pay was insufficient to make piece rates and its complementary management policies economically desirable in the shoe industry. Because piece rate pay raises nonlabor costs and workers' compensation, requires extra monitoring of workers, and makes it expensive to adjust to changing styles, time rates have come to dominate the U.S. shoe sector." As a footnote, Freeman and Kleiner provide data to show that shoemaking was the largest employer in the U.S. prior to the Civil War, slipped to seventh of 15 industries surveyed just prior to World War II, and was down to 80th out of 94 by the mid- 1990s.
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Title Annotation:Precis
Publication:Monthly Labor Review
Geographic Code:1USA
Date:Apr 1, 2005
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