Arnold Kling  

Productivity and Labor Utilization

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Brad DeLong has influenced my thinking on the current state of the economy. In a recent post where he looks at data on output relative to hours worked, he writes,


CEA Chair Greg Mankiw said last week that the 3.5% per year real GDP growth rate that the administration is projecting should make the unemployment rate next year lower than it is today. When I look at these productivity-and-output graphs, I can't see it. Output has to grow nearly 1% per year faster than productivity in order to hold the unemployment rate steady, and that can be the case with a 3.5% output growth rate only if trend productivity growth is now less than 2.5% per year. After staring at these figures, it seems to me likely that unemployment is likely to rise with anything less than 4% real GDP growth rate over the next several years...

What Brad sees--and I agree--is a remarkable rate of productivity growth, which in turn means that potential GDP is rising sharply. The result is a drop in labor utilization during what otherwise would appear to be an economic upturn.

For Discussion. How does the issue of whether or not labor utilization is the key cyclical indicator affect one's view about whether or not macroeconomic policy today should perhaps be more stimulative?


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CATEGORIES: Macroeconomics



COMMENTS (8 to date)
Eric Krieg writes:

Guys like Steve Forbes and Larry Kudlow, who believe monetary policy should be based on stable commodity prices (a gold standard for the 21st century), would say that the only thing that monetary policy can do is create or limit asset inflation. It can't reliably create real growth as its primary purpose (although stable asset prices might just do that.)

Since commodity prices have been falling for some time, Kudlow would say that Greenspan has been too tight with money for too long (even if he has been more loose with money in the last year or two). And the jobless recovery is just a manifestation of the too tight money supply.

Scott writes:

If by commodities you mean mostly minerals and agricultural products, then this sort of a policy doesn’t make much sense. Over the last several thousand years prices of these things have consistently fallen as new production techniques have evolved. As we get smarter and smarter it keeps getting cheaper and cheaper to find and produce these commodities.

I don’t understand why we should inflate the money supply every time someone figures out how to do something better, faster and cheaper.

David Thomson writes:

There’s nothing really complicated about this matter. The gods of creative destruction are ruthless and uncaring. Higher productivity gains in a particular industry will always force workers to do other things for a living. And if their current employer has nothing else for them to do---they must find another job. Unemployment may be a bad thing in a microeconomic sense, but it is often a good thing macroeconomically speaking.

What are the political risks for the White House? Alas, life is rarely fair. President Bush will at least take a small hit even if none of this is any of his fault. Human beings worry first, last , and foremost about themselves. Abstract rhetoric, however true, concerning the benefits to the overall society due to their job loss inevitably falls on deaf ears.

Eric Krieg writes:

>>If by commodities you mean mostly minerals and agricultural products, then this sort of a policy doesn’t make much sense. Over the last several thousand years prices of these things have consistently fallen as new production techniques have evolved.

David Thomson writes:

"Perhaps they would argue that stable commodity prices indicate a slightly expansive monetary policy, reflecting the fact that technology tends to make commodities cheaper."

We don't truly desire "stable commodity prices." On the contrary, we are better off if they drop to near zero! I concede that the social upheaval price tag will be steep, but in the long run--it's well worth paying. An expansive economic policy often prevents the gods of creative destruction from carrying out their responsibility.

David Thomson writes:

Rational people would applaud if gasoline prices dropped to a penny a gallon. Nonetheless, one should try to imagine the immediate results of this (so far) imaginary event. Countless people would instantaneously lose their jobs. Bankruptcies would dramatically increase. The social dislocations would be enormous and far reaching. Whole communities would become destitute. Like I said many times before: the gods of creative destruction are some real cruel deities.

Shawn Smith writes:

"Rational people would applaud if gasoline prices dropped to a penny a gallon. Nonetheless, one should try to imagine the immediate results of this (so far) imaginary event. Countless people would instantaneously lose their jobs." First, one would have to analyze the reasons for the drop in gasoline prices. Is it government-mandated price controls? If so, then people will lose their jobs, the people manufacturing, transporting, and selling the gas. Of course, soon there will be a shortage in gas and a black market will ensue that will bring about higher gasoline prices. Is it due to more efficient and cost-effective production, transportation, and marketing? If it is due to that then no one will lose their job necessarily. The gasoline companies will still be earning a profit (just as many computer companies earn profits despite a dramatic drop in computer prices). And consumers nationwide will have more disposable wealth at hand. Purchases of many goods would dramatically increase leading to increased employment in these other industries. So, although many workers in the gasoline industry may lose their jobs, these jobs will be replaced with new opportunities in other industries (most likely, better jobs because of increased demand).

adam writes:

why is it that productivity of labor will decline as you attempt to add personnel in the face of increased demand

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