For many years now, emerging economies like China and India have been able to draw business from the developed world by promising multinational companies cheap labor. A new report by the Conference Board shows the competitive threat is taking on a new dimension: Workers in emerging markets arent only cheap, their productivity is growing by leaps and bounds.
The Conference Board compared productivity trends across 111 countries and found an upsurge in output per worker in developing economies while developed country productivity slows. Between 2005 and 2009, for instance, the research group finds output per worker in emerging economies grew at a 5.9% annual rate. In the U.S. it grew at a 1.5% annual rate during the same period, while it grew 0.8% in Japan and 0.5% in the Euro area. In each of the developed markets, worker productivity slowed while it sped up in developing economies.
Emerging economies are charging ahead on one especially important measure of worker productivity called total factor productivity, which teases out productivity improvements that come from firms investing in new technology or hiring better-educated workers. Whats left is a pure measure of workers and firms learning to operate more efficiently. In emerging economies, TFP rose at an annual rate of 2.4% from 2005 to 2008, compared to 0.2% in advanced economies.
Bart van Ark, the Conference Boards chief economist, sees two reasons for the productivity gains. First, he says, poorly run firms in emerging markets are shutting down and being replaced by more efficient firms. Second, many firms are opening up with capacity to produce on a large scale and as these economies grow swiftly firms are reaping benefits from these economies of scale.
This raises their competitive strength, as it helps these countries to match higher costs, such as rising wages, by their ability to lower costs and prices through efficiency gains, the report concludes.
Last year was an especially difficult one for developed economies, especially Europe. Output per worker hour grew at a much faster rate in the U.S. (2.5%) than in Europe (-1.0), the Conference Board estimates. But it came at the expense of huge job losses in the U.S. Slow productivity growth in Europe in 2009 portends an especially slow jobs recovery in 2010. Mr. van Ark expects the U.S. job rebound to be a long, slog too.
Click here for more data from the Conference Board.