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MAY 24, 2004
By James Mehring What's Lifting Productivity There's more to efficiency than new technology The high-tech investment boom of the 1990s is credited for the labor-productivity surge of the past decade, with the implicit assumption being that businesses reap big efficiency gains just by installing new technology. But that's not the whole story. In an April Federal Reserve Bank of San Francisco Economic Letter, economics professors Sandra E. Black from the University of California at Los Angeles and Lisa M. Lynch of The Fletcher School at Tufts University point to another reason for the productivity boom: innovative workplace practices that are not always directly tied to investment in tech equipment. Examples include production ideas drawn from non-managerial employees, job rotation and job sharing, and tying compensation to performance.  While noting the difficulty in breaking out individual contributions to productivity from labor, technology, and other factors, the two economists conclude in an October San Francisco Fed paper that from 1993 to 1996 innovative workplace practices in manufacturing accounted for as much as 89% of the growth in what economists call "multifactor productivity." That measure is the component of overall growth in labor productivity that looks beyond the up-front investment in new technology. It gauges how businesses enhance production by combining workers and machines using technology, production processes, and managerial practices.These workplace changes "lead to a process of innovation, and that should have a long-run impact on productivity," says Lynch. So U.S. companies will stay competitive in the world economy. Plus, the increasing use of high-tech equipment will facilitate further changes in workplace practices, helping to fuel future rounds of workplace innovations. Better Health, On The Cheap Big-spending states have the lowest-quality care Health-care spending now captures 15% of the U.S. economy and is expected to keep growing as the population ages. But a study published in Health Affairs by Dartmouth College economics professors Katherine Baicker and Amitabh Chandra shows the extra cash isn't necessarily buying better care. In an effort to see whether higher medical spending improved the quality of care, the two economists used state Medicare claims data for 1995 and 2000. To judge quality, they used a list of 24 treatments developed by a Medicare Quality Improvement Organization program, such as mammograms for women and administering beta blockers to heart attack victims. The treatments have a direct impact on helping patients live longer and can be administered to just about anyone with the potential to benefit. Surprisingly, ranking states by inflation-adjusted per capita Medicare outlays shows beneficiaries in most bigger-spending states received lower-quality care than those in less profligate states. What's more, comparing 1995 and 2000 Medicare claims figures, a $1,000-per-beneficiary increase in spending dropped a state almost 10 spots within the quality ranking. The economists caution that they don't believe more spending causes lower-quality care. Rather, they find that high-spending states have a larger ratio of specialists to general practitioners. This could explain the spending-care gap in two ways, says Baicker. First, specialists generally engage in more expensive treatments, such as end-of-life care, crowding out Medicare spending for other effective but cheaper care. Second, there could be a lack of coordination between general practitioners and specialists, leading to less use of simpler and cheaper care that still yields high-quality results. If that's the case, "coordinating care better and optimally allocating resources could improve the quality of care for Medicare beneficiaries without increasing its costs," says Baicker. Making such changes could be crucial as baby boomers march toward retirement.   Taking Aim At Inflation A target might keep expectations in check If the Federal Reserve had an explicit inflation target, would it help to contain inflation? A study by economists Andrew T. Levin and Fabio M. Natalucci of the Federal Reserve Board of Governors and Jeremy M. Piger at the Federal Reserve Bank of St. Louis finds that inflation targeting does indeed control inflation expectations, a key driver in the inflation process.  The economists compared inflation forecasts for nine countries since 1994 to actual inflation in the three-year period prior to a forecast. In regions without a central-bank target, a one-percentage-point rise in the inflation rate within the three-year period raised expectations for the coming five years by nearly a third of a percentage point. Countries that do target showed almost no increase, because inflation expectations remained anchored to the targeted level.The results suggest that inflation targeting could reduce the chances that expectations become self-fulfilling by influencing future wage-setting and price contracts.
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