Arnold Kling  

Employment Forecasting

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I argue that criticizing the Administration's employment forecasts is hypocritical.


suppose you were to do a blindfold test. Give an economist the actual output growth of 7.8 percent over three years (roughly 2.5 percent per year) and ask the economist to "predict" the breakdown between growth in employment and growth in output per person. Almost any economist would have said something like "Well, the output growth sounds pretty close to trend. So, assuming that trend productivity growth is about 1.5 to 2 percent per year, I figure 5 or 6 percent total productivity growth and 2 or 3 percent total employment growth."

No economist in his or her right mind would have predicted that we would have gotten 7.8 percent growth in output with 11.3 percent growth in productivity and a loss of 3.1 percent in employment. That is completely outside the experience of history.


For Discussion. If you were told that productivity is likely to grow at 3 or 4 percent per year for the next few years, what policy implications would this have?


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CATEGORIES: Macroeconomics



COMMENTS (7 to date)
bailey writes:

RE: "No economist in his or her right mind would have predicted that we would have gotten 7.8 percent growth in output with 11.3 percent growth in productivity and a loss of 3.1 percent in employment. That is completely outside the experience of history."
Even if labor outsourcing is a principal factor leading to the increased "productivity" you refer to?

Lawrance George Lux writes:

Actually very little! The benefits of outsourcing have functionally been realiized. This is not to say the Unemployment picture will improve. I estimate the real cost of foreign products will increase by June, with American exports continuing their slide. American purchase of Imports will be off Four percent by Election Day (my perdiction). Productivity will immediately begin to erode, as American workers replace foreign workers' supply of Goods and Services.

Did you see Hal Varian's article in the NY Times? He tends to forget that scraps of paper become even more worthless, as they multiply without utility. lgl

Arnold Kling writes:
Even if labor outsourcing is a principal factor leading to the increased "productivity" you refer to?

Outsourcing per se does not count as a productivity increase. The measure of output used is "value added" which subtracts the cost of imported inputs, including imported labor.

Outsourcing only increases productivity to the extent that it shifts workers to make use of their comparative advantage. I doubt that this effect is what you are talking about or that it accounts for much in the aggregate productivity statistics.

bailey writes:

I haven't looked at historical correlation of mfp to labor & assumed you were referring to labor, which I believe tracks

Lawrance George Lux writes:

Arnold,
A problem with the value-added concept of output enters with the use of monetary value as evaluation. Part of the American problem with outsourcing, above the comparative advantage of the practice, comes in the form of ease of access to Currency in context of exchange rates. It is hard for me to explain the concept, as I have difficulty with it. The ease of Dollar conversion and easy supply of Rupees gives India about a 12% comparative advantage simply because they can pay their labor in Rupees, and sell in Dollars. lgl

triticale writes:

Outsourcing can even reduce measured productivity. I was working on the inventory software at a major Milwaukee manufacturing firm (thru a contract firm it was a "service" job if it showed up at all) which was shifting production to China. Product was coming in stacked on pallets made of bark, and mislabeled. Labor to restack and relabel went on the books as a local expense.

Barry Ritholtz writes:

Arnold makes a terrific point (one that I have been harping on for a while):

This is not the typical recession/recovery cycle. We've just exited the biggest speculative bubble in the history of mankind. Pop!

The period that preceded the bubble bursting set the agenda for what now follows: The late 90's saw enormous over investment, and the creation of massive excess capacity, along with all the subsequent destruction of a lot of capital that went into it.

We see this reflected in Arnold's LUCY measure.

On top of these excesses, the productivity enhancements means that companies can make more widgets with less people. (Outsourcing is a minor factor, with the numbers presently modest).

Consider also human nature -- 2003 was the 1st year in four that CEOs/CFOs have stock options above water. Will they risk that by hiring aggressively, perhaps to earlier, and risk missing their quarterly number ? I suspect not . . .

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