Mark Perry, at his Carpe Diem blog, points out that worker productivity and profits are at record highs, but firms have not been hiring very much.At first blush one might think that this is strange. It is natural to assume that production would be limited at a given level of employment for a given level of capital intensity. This statement is not as correct as one might intuitively assume. Ken Rogoff is quoted near the bottom of the post as saying that productivity increases may be resulting from the laying off of less productive workers. I think this is correct, but allow me to illustrate and expand on his point through metaphor.
I have apple trees, and a variety of much younger fruit trees. The young fruit trees are still in the early stages of growth and don't need my attention just yet - except to keep away the deer and other assorted whatnots that would damage the bark. But the apple trees have been growing for some time now. Only one is really mature, but they are all pretty big. What happens when trees get to a certain size is that some of the new branches interfere with the other branches. If the trees go untended, then the interfering branches become real nuisances to the other branches, and impede further growth. In fact, the interference can become so bad that bark gets rubbed off and exposes the tree to disease and death.
What is a good tree tender to do? Well, you have to cut out the interfering branches. Sometimes these branches are dead, often they are not. But you have to choose - sometimes the interfering branch is an older one that doesn't have as many buds on it as some new branch; sometimes it is the reverse. So every time you cut a branch, you choose the worst ones. The branch may be individually productive - but it is interfering with more productive branches. As a whole, because of one's tending of the tree and removing less productive (not just unproductive) branches, the whole apple tree fares much better.
I believe the metaphor is obvious - the branches are the employees, and the apple tree is the firm. As I keep the apple tree pruned, its productivity goes up. Same with the firm.