It is Econ 101 that ever rising labor productivity is the key driver of modern economies. When the amount of output per worker is higher every year than the year before all of the good stuff that Americans have come to expect is possible. The economy grows steadily with room for higher wages/benefits and consumer spending, business profits, savings and investment, and enough tax revenue for government to meet public investment and social needs. Without rising productivity, the economic pie stops getting bigger and we are all left fighting over the size of the slices. A zero-sum economy begets zero-sum politics, and we all look around for someone to blame.
Sound familiar? It’s starting to happen. Worker productivity roughly doubled in the USA from 1945 to the early 1970s, then slowed down for the rest of the 20th century. But since then it has slowed to a crawl, only growing about 0.5% annually since 2000. In 2016, productivity actually began falling.
Now, maybe the fall is temporary, an artifact of the Great Recession. Maybe it is not happening at all. There is some evidence that the way experts measure labor productivity fails to capture some important improvements in the quality of the goods and services workers produce. Maybe.
But, there I another problem independent of measurement error. Even before U.S. labor efficiency slumped, American workers were not getting paid in line with what they were producing. Since 1973, U.S. workers have become 75% more productive, but average worker compensation (pay + benefits) grew by less than 10%! When liberals say rising inequality is unfair, this is what we mean. It’s not some philosophical judgement of how much people are “worth” to society. How well do you think regular people will fare if, on top of this unfairness, the productivity slump persists and the pie stops growing altogether?
So, this is not a dry topic about formulas and equations. It is about what makes our economy healthy and innovative and how we can ensure that regular Americans share in the wealth they produce.
To keep us focused, I will start us off on Monday with a quick summary of:
- What is meant in plain English by labor productivity and what really drives it (opinions differ on the latter); and
- The main theories of why it has stagnated recently and whether we have a long term problem.
Then, we can debate any aspect of this broad topic-of-everything we want to discuss. The main driver of productivity in the long-run is technological innovation, but other things matter, too, including public policies. I hope we can devote a good chunk of time to discussing the growing divergence between worker compensation and productivity. But, keep in mind that any public policies to close that gap need to do so by raising the former, not reducing the latter.
DISCUSSION QUESTIONS –
- Measuring it: How do they measure labor productivity? Could it be growing faster than experts think?
- Ensuring it: What keeps U.S. labor productivity rising; e.g., healthy biz/entrepreneur climate, R&D/Universities, tech innovation, worker edu/skills, government action/inaction?
- Problem. Why has productivity suddenly cratered? The recession?
- Problem! Is something deeper afoot? Are we entering a prolonged period of “secular stagnation” like we talked about in 2013?
- Problem!! Why has pay not kept up with productivity for decades?
- Solutions: Which pubic policies might (a) goose worker productivity in the short-term and long-term, and (b) ensure American workers benefit from it? Left vs. right solutions.
SUGGESTED BACKGROUND READING –
Productivity Puzzle –
- This one chart shows how vital productivity growth is! Recommended.
- Overview of our economy’s low growth problem, including sagging productivity. Recommended.
- The productivity paradox Recommended. (If blocked by paywall, click here then on 5th link from the bottom, “Populists and Productivity.”
- The Great Productivity Puzzle. Recommended.
- Relax, innovation will return.
- Neither party really knows how to boost long-run economic growth. Krugman agrees.
- Progressive POV: Part 1 and part 2. Recommended.
- Conservative POV.
Next Week: Do government anti-poverty programs really work?