The Productivity Trap in Technology

How Increases in Output and Productivity Don't Translate into Jobs

June 2006

By AngelouEconomics

The technology industry is experiencing renewed growth, and the outlook for many new and emerging industries is now brighter than ever. Spending on information technology returned in the third quarter of 2003 and has held steady at 5 percent per year since. As a result, the technology industry has emerged from the economic downturn of the previous years stronger than ever, but manufacturers have had to introduce leaner and more efficient production technologies and processes in order to stay competitive. Examining trends in production and employment for technology industries underscores this competitive response.

Most technology sectors have experienced an increase in production in the years since the recession of 2001 and 2002. Productivity gains drove the return to profits for many companies, but job cuts proved to be a necessary means to increase overall worker productivity. Semiconductor manufacturers registered the largest 2-year growth in worker productivity (32% from 2002 to 2004), followed by telecommunications equipment manufacturers (24%) and computer manufacturers (22%). Technology manufacturing continues to expand its output across most sectors, even though manufacturing employment continues to fall. In total, technology manufacturers have shed 1.2 million jobs since the industry’s peak employment in 1998.

A continuing and severe drop in capital expenditures by technology manufacturers further shows how companies responded to the downturn by relying on and retooling existing plants rather than making large new investments. The computer and semiconductor sectors registered the largest drop in capital expenditures.

The improvements in production methods do not bode well for the technology-manufacturing worker; in most sectors, employment is expected to continue to decline as competitive pressures require more purchasing from offshore locations and more automation at final-assembly plants in the U.S. The computer industry reflects this trend. The computer industry employs about 1.3 million workers and large companies (over 250 workers) are employing a growing majority of the industry’s workforce. Employment in the industry is expected to decline by 7 percent between 2004 and 2014, compared with a projected job increase of 14 percent for the overall economy. Although the output of this industry is projected to increase more rapidly than that of any other industry, overall employment will still decline as a result of continued rapid productivity growth and increased efficiency. Despite this, industry leader Dell appears to be bucking this trend. Its new plant in Winston-Salem, NC is expected to employ 1,300 workers by the end of 2006 – 550 more jobs than expected when they announced. The company also continues to expand its Nashville operations.

The increasing global market for manufactured goods has caused the manufacturing industry worldwide to rethink the entire concept of manufacturing. Creating and delivering manufactured goods no longer requires each process to be completed by one enterprise, but rather a global supply chain where each individual process can be completed anywhere in the world. Many manufacturers must outsource for the lowest cost to remain competitive. Despite appearances, improvements in technology have affected manufacturing workers across the globe, resulting in job cuts far larger than what has been experienced in the U.S. Japan and Germany have lost a larger percentage of their manufacturing jobs, 28% and 22% respectively, versus a 15% loss in the U.S. And while China has been blamed for many of the manufacturing job losses in the U.S., they too have suffered large job losses—15% of their manufacturing workforce over the same period.

Manufacturing job losses do not signal the end of U.S. manufacturing. Several non-cost factors will drive investments in manufacturing in the U.S. long-term: access to inputs/ resources, delivery-time to market, safety regulations, tariffs, security, intellectual property protection, and the customization of consumer products. U.S. manufacturing will remain competitive in capital-intensive industries with plants using advanced robotics and automated processes. Furthermore, many new inventions and products stem from the manufacturing sector’s large investments in research and development. Manufacturing firms fund 60% of the private sector’s R&D investments each year.

The good news is upon us: after steep jobs cuts during the recession, U.S. manufacturing employment has stabilized and has even seen modest increases in recent months.