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WSJ: Are Productivity Gains Bad for US Workers?

Posted By Barry Ritholtz On August 26, 2003 @ 11:57 am In Finance | Comments Disabled

David Wessel of the WSJ wrote:

“The argument is simple, convincing — and wrong. Surging growth in productivity, the amount of stuff we make for each hour of work, is not the cause of our current economic malaise. Wishing for slower productivity growth so we can have more jobs is foolish.
-Productivity Gains: Never Bad, Even for American Workers [1]

I’ve been meaning to address this issue since “Productivity Gains: Never Bad, Even for American Workers [1]” came out. The prior extensive work I’ve done on this subject convinvces me that there are negatives for US workers; (See: The New “Productivity Paradox [2]); The bigger issue is for policy makers such as the Fed:

In 1987, Nobel laureate Robert Solow famously observed: “You can see the computer age everywhere but in the productivity statistics.” Despite massive investment in IT infrastructure, productivity growth was nonexistent. At the time, this was known as the “Productivity Paradox.”

Since the mid-‘90s, the Productivity Paradox appeared to have been solved, as U.S. productivity growth surged. Since 1995, labor force productivity has been increasing at 2.25% per year, double the annual rate of the previous two decades. This “productivity feast,” as its been called by Fed Chairman Greenspan, is the largest increase in non-farm business output per hour in 30 years.

Therein lies the new Productivity Paradox: Productivity continues to increase year after year at 2.5%; At the same time, the labor force itself is growing at ~1.3% per year. Thus, Real GDP has to increase at 3.8% per year just for the economy not to hemorrhage any more jobs.

During the boom year, productivity increases got the credit for a myriad of positives: increased living standards, higher corporate profitability, boosted tax revenues, better funded pension plans. Now, we are confronting the dark side of productivity: Companies need less laborers to produce more goods and services; Less workers means less consumer spending, lowered tax receipts, weaker corporate profits . . .”

I think the WSJournal writer is focusing on the wrong issue — its not whether productivity is good/bad for US workers; That argument merely “tilts at windmills;”

The relevant issue is “How high must GDP rise in order to stop losing jobs, and start creating them?”

At the present levels of labor pool growth (1.3% / year) and Productivity (2.5% / year), a 3.8% GDP merely stops losing jobs; A GDP rate in excess of 4% will slowly start creating jobs. It may take a 5% GDP (+/-) to robustly create jobs.

This is of greatest significance to the Fed, who typically tends to slam on the brakes at those GDP levels. In the present, post-bubble, excess capacity environment, the Fed should (even at the risk of inflation), not constrain the job creation ability of the economy by raising rates until we see significant improvement in the jobless rates.

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URL to article: http://www.ritholtz.com/blog/2003/08/wsj-are-productivity-gains-bad-for-us-workers/

URLs in this post:

[1] Productivity Gains: Never Bad, Even for American Workers: http://online.wsj.com/article/0,,SB106141948614575300,00.html

[2] The New “Productivity Paradox: http://bigpicture.typepad.com/comments/2003/06/the_new_product.html

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