Arnold Kling  

The Economy in Transition

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Michael Spence and Sandile Hlatshwayo write,

For the tradable sector as a whole, value added per job rose substantially, an increase of 44 percent from 1990 to 2008, far above the increase of 21 percent in the economy as a whole. The tradable sector is gravitating toward higher value-added components of global supply chains. These consist, in broad terms, of high-end services, some in manufacturing industries and some, like finance and insurance, in pure service industries.

This is from a paper that Tyler Cowen calls

one of the most important papers of the year and perhaps the most important paper so far on "economic malaise" issues.

My remarks

1. In general, you have industries where productivity grows faster than demand, and you have industries where demand grows faster than productivity. Employment will shift out of the former and into the latter. An obvious point, but worth bearing in mind.

2. I think that if we want to know about the well-being of workers, we need to know something about their consumption patterns. If you mostly consume tradable goods (or lots of free stuff on the Internet), your income does not need to have increased in order for you to have experienced a big improvement in your well-being over the past two decades. On the other hand, if you want a lot of education and health care, then even if your income has grown a lot, you may be barely treading water.

3. Perhaps some people are using their incremental wealth to consume more leisure, while others are using their incremental wealth to expensive colleges and getting a lot of unnecessary diagnostic tests and elective surgeries. The latter will appear to have higher income and more consumption than the former, but who is really better off?

4. In general, the measurement of trends in economic well-being is going to be very tricky from now on. For an agricultural economy or an industrial economy, you can do a reasonable job by counting bushels or widgets produced. But the measurement of value added in education and health care is fraught with difficulty and major controversy. Moreover, if consumption patterns across individuals and groups are diverging as much as I think they are, then there really is no "average American household" to speak of, and the very process of aggregation is seriously misleading.

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CATEGORIES: Growth: Consequences

COMMENTS (2 to date)
Lord writes:

If what you value is a good job, interesting, stimulating, well paying, you may be very disappointed and much worse off.

Shangwen writes:

I'm only commenting on the health care aspect of the paper. I think it gives further support to the problem of low and declining productivity in health care, although I understand that the value-added issue they studied probably did not incorporate patient health outcomes from health services. This is partly a Baumol problem, partly a rent-seeking/regulatory overkill one.

Hlatshwayo and Spence report a 9% decline in VAP in US health care. Last week the UK's Office of National Statistics reported a 3.3% decline in productivity in the UK health sector over 15 years, most of which happened in the last ten.

I think point #3 is important...there is a lot of blather in the health care sector about how health care is "booming" (true in a hiring sense), and how it will drive economic growth (see above points). I know PPACA had all kinds of evidence-based/value-for-money/effectiveness language built into it, but I can't see any of those initiatives making a dent in excess costs, other than in some of the slam dunks like cardiac stents, vaccination, and diabetes management.

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