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Home Publications Blogs Beat the Press At Last, We No Longer Have to Worry About Productivity Growth

At Last, We No Longer Have to Worry About Productivity Growth

Friday, 04 June 2010 05:30

Many economists had complained about rapid productivity growth as main factor in preventing the economy from generating more jobs. In this context, the downward revision of the first quarter number to 2.8 percent yesterday should have been good news. We know longer need to worry about rapid productivity preventing job growth. The 6.1 percent growth rate from the first quarter of 2009 to the first quarter of 2010 is only slightly faster than the 5.4 percent increase from the third quarter of 2002 to the third quarter of 2003 and the 5.3 percent growth from the first quarter of 1970 to the first quarter of 1971. It is the same as the rate from the first quarter of 2001 to the first quarter of 2002. In short, the rapid rate of productivity growth coming out of the recession should not have been a surprise.

It is also worth noting that better than expected productivity reflects directly on the intergenerational issues that the deficit hawks constantly rise. If productivity grows more rapidly than expected, then future generations will be wealthier on average than our projections show. This suggests that deficits are not having a negative impact on their well-being.

Comments (5)Add Comment
Are You Serious
written by Donald Pack, June 04, 2010 8:27
I'm going to assume your last paragraph was done tongue in cheek. While productivity growth may be off the scale it is also true that the benefits of that growth are going to fewer and fewer people.

In the old days productivity gains were basically divided rather equally between management/stockholders and labor. That link has been busted for years as we embraced and worshiped globalization.

Now the benefits go to the few (biggest gains by the top 5% since the Great Depresssion, coincidence, I think not) and lower paying jobs with less upward mobility go to the masses.

Globalization has killed the goose that laid the golden egg. Don't believe it-look at same store sales for Walmart. The consumer is tapped out and since they represent 70%+ of GDP that's a problem for the corporatists.
written by izzatzo, June 04, 2010 8:36
Many economists had complained about rapid productivity growth as main factor in preventing the economy from generating more jobs.

This makes the collective head hurt even more. By this reasoning, a bloated finance and health care sector that produces less and less, is seemingly better and better for the economy as a whole to maintain more employment.

Baker makes sense of the seeming contradiction by pointing out that logically, when coming out a recession, the low hanging fruit of higher unit productivity usually occurs first. Kicking idle resources into gear does have some start-up costs, but precisely because they're already in place for the most part, the incremental cost of using them is low compared to output produced.

That's an entirely separate question of the trade-offs incurred at full employment among all resources, when the same resources become scarce compared to each other, because the opportunity cost of using them in one place is not using them in another place.

This is where productivity plays the more commonly understood micro role of reducing unit cost, presumably to push resources to their highest valued use under the principle of Adam Smith's invisible hand.

Economists who claim that increased productivity can stifle a recovery, are effectively making a Keynesian argument of over supply, that free markets can fail on their own, coming to equilibrium at less than full employment and dwelling there for a long time.

The Teabagger mindset is that this is not possible, that increased productivity always translates to reduced unit costs which translates to reduced prices and more sales which translates to full employment, a mythical tautology that supply always equals demand at the "natural" rate of employment, disproven decades ago.
Luddite economics returns
written by skeptonomist, June 04, 2010 9:38
This seems to be another case of economists (or more likely economics reporters and pundits in the media) mistaking a derivative quantity for a causative factor. In the long run productivity is strongly correlated with capital; investment in machinery reduces the number of workers required. But in a recession, productivity may increase temporarily as seemingly superfluous jobs are cut (as Dean has pointed out before). Such increases are certainly not due to greater investment, and they are not "preventing" employment increases; the causation is the other way around.
know your homophones
written by tew, June 05, 2010 11:34
"...know longer need to worry about rapid productivity preventing..."
know --> no
and insert "growth" between "productivity" and "preventing"
Tew decrease productivity & raise employment, simply . . .
written by JHM dba "Henry Phord", June 06, 2010 4:05

. . . produce your product wrong enuf the first couple of times that whole hordes of patchers and fixers are required before the mousetrap even tries to get off the runway and into the showroom.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.