The Power of Productivity

Dr. Kling:

Perhaps you can clarify something for me: your quotes are saying that marginal products are rising, reaching their all-time highs. It's not clear to me how marginal revenue is changing but for the sake of argument I'll assume it's relatively flat. If this is the case then shouldn't we see a rise in wages (holding employment constant) or employment (holding wages constant, according to the theory that workers will be hired until MRP = w. But that's not what we are observing; we are only reading about the middle class with flat or decreasing wages and massive layoffs. Would you clarify this for me?

Government growing faster than the productivity rate, Daniel.

I was reading on some blog (can't remember which one, unfortunately) that some nontrivial amount of the productivity growth was the result of products that were largely manufactured elsewhere but were trivially "finished" here (and hence counted as "Made in America") for marketing / political reasons.

Do you have any sense whether this is true and if so to what extent it pads the "more stuff by fewer people" statistics?

Between this post, the Varian/HIPPO post, and the post on Creative Destruction, it does seem very legitimate to me to worry about how long the 'Recalculation' might take for folks in the U.S. to actually find gainful employment.

Admittedly we can't predict what the next burst of human creativity will come up with, but the recent trend of successful companies does not provide large-scale employment the way the industrial giants did.

Doc Merlin, Exactly! And add the effects of inflation which reduces real wages, it's amazing the American worker can still feed himself!

We could only hope that this would cause unemployment, at least temporarily. That means that we will be able to buy more things with the dollars we do make because the costs of the production will drop freeing up capital for companies to lower prices or to innovate. Good news.

To J. Daniel Wright:

There are massive wage increases, but they are disguised as medical insurance costs that companies have to pay. Any honest study of wages would include this in compensation, especially since changes are so drastic.

Also, input costs are generally rising.

Highly skilled wages are rising even excluding medical costs. There really are two economies, skilled and unskilled. Arnold's new book gets at the the fact that in the new economy, the old way of thinking (MRP = w) is meaningless.

BLS says the average US manufacturing wage is $18/hour.

Arnold,

I really, truly respect you as an economic commenter. Yours is one of my "go to" blogs.

However, your posts on productivity increases are consistently full of excrement. You have been called out on this by multiple commenters, many of whom cite real-world experience and write quite knowledgably about the subject.

Now, typically your posts on productivity consist of a quote from someone else, and minimal comment by you. Since most of us respect your intellectual point of view, I suspect many of us would really appreciate your actually taking the time to think about the issue, and explain what you are thinking.

Objections to "productivity increases" which I and others have raised include:

* Measurement in nominal dollars invites inconsistency
* Time series mismatching when productivity over a period is measured against employment at the end of the period, in an environment of decreasing employment
* Lack of system resiliency, where "normal" production can be achieved with a decreased workforce, but as soon as an exogenous shock enters the system (server malfunction, infrastructure collapse) lack of labor resiliency hamstrings productivity
* And many others

To my knowledge you have never responded to any of these comments or questions.

My request - and it's your blog, of course - is that you respond thoughtfully and intelligently to these issues. I suggest to you that you are damaging your brand with these quotes and one- or few-liner comments. There are blogs whose brand is based on distilling ideas from elsewhere without much in the way of real intellectual commentary. So far, Econlog has not been one of these. We are used to seeing real intelligent discussion of the issues here, and I for one would like to see you devote some real thought (and verbiage) to the issue of productivity "increases". Even if you disagree with those of us who suspect that productivity "increases" in the current economic environment are a lie, please at least Explain Why You Think So.

Thank you very much,

A Big Fan

The average product of labor in manufacturing is high, but workers are paid their marginal, not average product, and the remuneration includes taxes and also a union-monopoly premium. The average output per worker includes the contribution by capital goods and land.