Productivity and unemployment: the Dark Side?

Wednesday, December 31, 2003 | 05:38 PM

A quick post before heading out for New Years (what type of wonk feels compelled to write about these things on New Years's Eve? I shudder to think about it).

Alex Tabarrok has an interesting post over at Marginal Revolution.

Alex notes he is "growing increasingly annoyed with people who argue that the dark side of productivity growth is unemployment:"

the "dark side" of productivity is merely another form of the Luddite fallacy - the idea that new technology destroys jobs. If the Luddite fallacy were true we would all be out of work because productivity has been increasing for two centuries. Sure, some say, that may be true in the long run but what about the short run? Even in the short run there is no necessary connection between productivity growth and job loss. In the computer industry, for example, productivity growth has led to falling prices and a bigger not smaller industry. If demand is inelastic then productivity growth can create short-term unemployment, especially at the level of the industry experiencing the growth - less likely but not impossible is that productivity growth leads to short-term economy-wide unemployment.

I think Alex draws a defendable -- but wrong -- conclusion about the hand wringing over productivity: It's not that some economists are wishing productivity growth were lower, so employment would be higher; Rather, its a recognition that it may take a substantial uptick in GDP to overcome the productivity hurdle and to lead to a sustained increase in hiring.

First off, we should all understand that productivity is a "good thing" -- higher productivity raises everybody's standard of living; it makes goods and services cost less, or in the alternative makes them more profitable to manufactur/sell.

Here is the flip side (what he called the "Dark Side") of productivity: If it used to take 10 workers to make 100 widgets, and now it takes 7 workers, thats 3 less employed people (at least as widget makers). Back in June 03, I termed this "The New Productivity Paradox.”

During normal economic recoveries, as companies see demand rise, they add to headcount in order to be able to meet those new orders. At least, that's what they used to do; Today, it seems there is so much elasticity in the manufacturing and/or service process via productivity improvements that there is little need to add an appreciable number of employees.

With the labor pool growing between 1-1.25% a year, and productivity somewhere north of 4%, a GDP of a minimum of 5% is needed just to not lose any additional jobs. Despite the scorching 3rd Quarter GDP of 8.2% (annualized), we saw only marginal improvements in employment situation.

Thus, its not a desire for weaker productivity to creeat more jobs -- that would be terribly inefficient. To the contrary, it is a recognition of reality, and a hope for higher than typical GDP growth in order to see the economy grow on a self sustainable basis.

As long as productivity stays at the present lofty levels -- and we maintain high levels of excess capacity -- we should be prepared to see anemic job gains. At least, until the economy is running at a much higher GDP. Its likely that, at some point in the future, productivity will naturally drift down a bit to a level number. But that's likely to occur much later in the cycle, when employment won't be an issue.

Happy New Year!

UPDATE (1/1/04 8:19am: Alex happens to be the author of a very interesting book, "Entrepreneurial Economics: Bright Ideas from the Dismal Science." I first stumbled across the book by accident in Huntington (The Book Revue) over the summer. I thumbed thru quite a few pages, and found it intriguing. I hadn't realized I was fisking a published author.

Marginal Revolution: Productivity and unemployment
Alex Tabarrok, December 31, 2003

Real Business Cycles: A Legacy of Countercyclical Policies
Satyajit Chatterjee, Senior Economist and Research Advisor
Federal Reserve Bank of Philadelphia, March 1999

Wednesday, December 31, 2003 | 05:38 PM | Permalink | Comments (1) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Posted by: hamdi | Feb 12, 2004 11:46:39 AM

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