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Productivity Growth Lags in Food Manufacturing

Productivity in U.S. food manufacturing has been growing slower than productivity in U.S. manufacturing overall. Between 1975 and 1997, productivity growth for U.S. food manufacturers averaged 0.19 percent a year, versus 1.25 percent for all U.S. manufacturers. Labor’s not to blame: output per labor hour in food manufacturing increased steadily over the 22-year period.

Food manufacturing industries ranged in annual productivity growth from -0.42 percent to 1.12 percent. In general, less processed food industries like meatpacking and fluid milk evidenced little productivity growth. These industries use relatively expensive raw materials to make highly standardized products. On the other hand, the beverage and bakery industries—which rely more on labor, elaborate packaging, and sophisticated extrusion technologies—had productivity gains of around 1 percent each year.

Productivity is the rate of growth in output net of growth due to increases in inputs—materials, labor, capital (machinery and buildings), and energy. Food manufacturing is materials intensive, with raw and semiprocessed agricultural products and packaging materials constituting 60 percent or more of the value of output. Productivity measurements capture the effects of applying more efficient techniques, technologies, or equipment to the manufacturing process, such as a labor-saving technology that allows a food company to make more corn chips per shift with fewer employees. Often, increases in productivity result from investments in research and development (R&D) into new production methods that lead to efficiencies like the example above.

Food manufacturing’s sluggish productivity growth may be due to modest R&D expenditures of late. According to ERS data, R&D spending by food manufacturers grew an average of 2.22 percent a year (adjusted for inflation) during 1975-97. Over the same period, the National Science Foundation estimates that private R&D expenditures by all U.S. manufacturing companies grew 5.78 percent yearly.

The efficiencies associated with higher productivity often lead to lower prices or smaller price increases. In the case of the food manufacturing industry, then, one might expect to find increasing prices. In fact, inflation-adjusted wholesale prices for processed foods declined an average 2.13 percent a year over 1975-97. Given this industry’s low productivity growth and its materials-intensive nature, these lower prices more likely resulted from a decrease in the prices of raw agricultural products (3 percent yearly during 1975-97).

This article is drawn from...

Food Manufacturing Productivity and Its Economic Implications, by Kuo S. Huang, USDA, Economic Research Service, October 2003, TB-1905.