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Maintaining Profits and Productivity in the New Economy—Viewpoints | EPI

Opinion pieces and speeches by EPI staff and associates.


Maintaining Profits and Productivity in the New Economy

by Eileen Appelbaum

The Clinton Administration’s creation of a Manufacturing Task Force to improve the strength of the U.S. manufacturing sector is welcome news.

With the hype surrounding the “new economy,” it’s easy to overlook the fact that improvements in manufacturing efficiency have outpaced overall productivity gains this decade. Figures from the Bureau of Labor Statistics show that manufacturing productivity grew at a 5.6 percent annual rate in 1998, compared with 2.4 percent for the economy overall.

Service industries are great at creating jobs, but manufacturing still provides the lion’s share of the productivity gains that allow living standards to rise — and that have dampened inflation despite record low unemployment. Manufacturing strength is the foundation for stable prices, strong job growth, and rising real wages.

Investments over the last 15 years in computerized process technologies and electronic information systems have also contributed to manufacturing productivity growth. But that is only part of the story. The renaissance in American manufacturing since the rust belt days of the 1980s is not simply a matter of a technological quick fix.

To compete in today’s global marketplace, companies must meet standards for customization, product quality, and on-time delivery. Managers know they can’t afford quality fixes at the end of the production process. Not only is it costly, it disrupts delivery schedules and creates disgruntled customers.

Meeting today’s competitive demands is a lot easier when firms adopt high-performance workplace practices. These are practices that let front line workers make decisions and give them responsibility for solving problems. Change is not easy, but companies are more successful when managers share power and knowledge with workers and workers assume increased responsibility and are allowed more discretion.

In self-directed teams, workers are able to eliminate bottlenecks and coordinate the work process. In task forces that improve quality, they solve problems — communicating directly with workers, managers, experts and professionals outside their own work groups to accomplish these goals.

Blue-collar workers also need skills to make wise decisions as well as incentives that motivate them to use their imagination, creativity, enthusiasm, and knowledge to improve efficiency and quality.

Education levels of factory workers are rising and training for workers in high-performance settings is increasing. Employment security agreements give workers a stake in the company and let them know that they will still have a job once the plant is more efficient. Pay practices provide a financial incentive to make plants productive. And jobs in high-performance workplaces often provide intrinsic rewards — more challenging work and more opportunities to be creative.

Recently, my colleagues and I completed a 4-year study of steel, apparel, and medical electronics and imaging. We visited 40 plants, collected hard performance data, interviewed numerous managers and union officials, and surveyed more than 4,000 employees. We found that high-performance work systems in manufacturing really do pay off.

Expensive equipment operated more continuously in steel mills, throughput time (i.e., the period needed to process orders) and labor costs were reduced in apparel factories, and costly inventories of components and medical equipment were decreased.

The worker survey allowed us to further examine outcomes that directly affect employees, such as wages, stress, and job satisfaction. After taking individual characteristics into account, we found that workers in more participatory work systems receive significantly higher intrinsic rewards, and those in apparel and steel have higher hourly earnings. In steel, workers also have higher job satisfaction.

As for stress, workers in more participatory settings were not more likely than were other workers to report having too much to do or too many demands on their time. They were, however, less likely to report conflict with co-workers or involuntary overtime, and were more likely to be satisfied with the cleanliness and safety of their surroundings.

Manufacturing policies and programs should target training and investment dollars to companies and unions that are engaged in making the difficult changes that lead to high-performance workplaces. Our research shows that these practices can give plants a competitive edge. But our study also indicates that superior performance is not always enough to keep a plant open. Forces far from the shop floor may influence that decision. For example, the global financial crisis that began in 1997 placed many of our most efficient plants at risk.

The Manufacturing Task Force may not be the panacea for the assorted challenges facing the U.S. manufacturing sector in the New Economy. But the Task Force can certainly enhance the competitiveness of U.S. industries in the new century by recommending policies at the micro level that encourage the adoption of high-performance work systems. At the macro level, the task force can propose strategies in support of a global financial system that promotes more stable capital flows and international agencies that raise living standards and expand internal markets in less developed countries.


Eileen Appelbaum is EPI’s research director. She specializes in labor markets and workforce issues.

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