October 30, 2022
Remarkable Productivity Growth in Hospitality and Tourism
Fall is a time for inexpensive conferences and parent weekends at colleges, and so, over the last month, I’ve been traveling extensively in the eastern half of the country. Some folks enjoy travel for the beautiful scenery, historic architecture and differing cultures. As an economist, I also think about local productivity differences over time—we are romantic in that way. What I saw offered only good long-term prognosis for the economy.
Travel causes intense interaction with the hospitality and tourism sectors. These are sophisticated industries, whose productivity has local effects on employment and business profitability. This is also the only sector nationwide not to have a full employment recovery in the post-recession period. That’s not necessarily a bad thing if it is accompanied by productivity improvements. Everywhere I visited, I saw productivity improvements.
Economists measure productivity as the value of goods or services sold per unit of inputs. Inputs are people, raw materials or equipment. In the hospitality and tourism sector, this means mostly getting more revenue per worker. People are a huge cost share to this industry, so making more money per worker is always the goal of productivity improvements.
This example also demonstrates the importance of thinking like an economist. A more productive business requires—and hires—fewer workers. So, if you think that business is the single measure of an economy, as many novices do, you’ll view productivity growth as unwelcome news for a region. However, fewer workers in a hotel or restaurant is just the first in a multi-step effect of productivity growth.
Productivity growth, and a declining number of employees, means that each remaining worker is more valuable to a company. This ultimately means higher pay, more investment in worker training and better fringe benefits. Moreover, if the productivity effects are widespread, it boosts the wages of all workers across the region. Productivity growth also reduces the price of the goods or services sold, causing customers to buy a larger quantity.
There are a couple caveats to these salutary effects. If the productivity growth is very fast, it will displace more workers than can be absorbed by the natural growth of the economy. If the displaced workers have few other skills, they might struggle finding new work. Also, if the local industry is heavily monopolized, workers might not see the gains of their productivity.
Fortunately, in the case of hospitality and tourism, few places will exhibit any of these characteristics. Even in Orlando, Florida, home of the largest destination tourism market in the world, labor markets are competitive. Disney doesn’t enjoy a glut of workers. So, the effects of productivity growth in these sectors will be shared by business owners, workers and consumers alike.
There’s enormous focus on automation and digitization as a source of productivity growth. That makes sense; robotics, computers and other equipment are all around us. But, automation is probably not the largest factors affecting productivity growth.
We’ve all seen the newish automatic pay kiosks that are the standard in most fast food restaurants. These cut labor costs, but are really just the next iteration of productivity enhancements that came from McDonald’s laying out a production line 70 years ago. This pace of productivity improvement is relentless, from self-service drinks to drive-thru lines. There are hundreds of other small examples of this.
Most of us have experienced online payments as well. This seems new, but it is just a few technological steps up from a cash register, or the numberless picture keys that were introduced on them in the ’80s and ’90s. Each step that cuts out human involvement cuts labor costs in some tasks, but it also increases the importance of the workers who remain.
Perhaps the biggest change to productivity comes from altering what and when a task is performed. This is an area that is particularly tied to human skills and judgment. I spent six nights in a hotel room this month, and did not have my towels exchanged or bed made. That’s a marked departure from even a few years ago, when most hotels changed towels and at least made beds every day. Likewise, many restaurants are closing earlier, choosing to operate only during the most productive periods. Cutting tasks and delivering fewer services during periods of low demand are evidence that these hospitality and tourism businesses are trying to be more productive. What’s left are workers performing tasks that are more complex, such as customer service, rather than mundane tasks like making a bed.
That’s the story of almost all productivity changes. We automate those things humans aren’t particularly good at, and pay more for the things we are good at doing. Humans aren’t particularly strong animals, so our early attempts at productivity growth used animals to move goods, plow fields and grind flour. We aren’t fleet of foot, so we built aqueducts to move water and roads to carry wagons. Newer productivity improvements used robotics to do mundane but complex tasks like assembling cars. Computers now do computations in portions of a second that 75 years ago would’ve required every human being to do calculations by hand for years.
This productivity growth is better for firms. We know that simply because they are spending resources to become more productive. We need no more insight than their behavior. When the dust settles, it is almost certain that hospitality and tourism will be less expensive in inflation-adjusted terms than they were before COVID. That has been the case throughout the past 300 years of remarkable productivity growth. But, has it been better for workers in the hospitality and tourism sector? In the most recent jobs report, that sector saw the largest annualized increase in wages. Hourly wages in this sector grew by 7.9 percent, much faster than the 5.0 percent that all private sector workers received.
This is good news for business owners in the travel and tourism industry, good news for those of us who consume their services, and especially welcomed news for the people working in that industry. Of course, it should go without saying that all of this is possible through the marvels of market economics, where business, workers and consumers all seek what’s best for themselves. In so doing, they quietly deliver value and growth across the economy.
About the Author
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