The Food is Poison and the Portions are Too Small II: Krugman and Productivity Growth

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Monday, 10 December 2012 04:50

Paul Krugman had an interesting column today calling attention to the rise in the profit share of income. The point is that we seem to be seeing rapid improvements in productivity growth (he cites the progress in the development of robots) that are drastically reducing the demand for labor. Yet all the gains from these improvements seem to be going to owners of capital as the labor share of output has been falling sharply.

The distributional issue raised by Krugman is extremely important, both for workers who are not seeing gains in living standards, and also for the economy as a whole, since a continual upward redistribution of income will lead to stagnation as a result of inadequate demand. However, it is worth noting that the concern that rapid productivity growth will lead to less demand for labor is 180 degrees at odds with the often repeated concern that productivity growth will be inadequate to sustain rising living standards in the future.

Even Krugman raised the latter concern when discussing a new paper by Robert Gordon suggesting that productivity growth was coming to a halt. However it features much more prominently in the whining over demographics that are a constant feature of national policy debates.

This is one where a baseball bat might be necessary. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs. Let's try that again. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs.

It is possible for too much productivity growth to be a problem, if the gains are not broadly shared. It is also possible for too little productivity growth to be a problem as a growing population of retirees imposes increasing demands on the economy. But, it is not possible for both to simultaneously be problems. (For fans of arithmetic, I just did the numbers on this. It is highly unlikely that lack of productivity growth will be a problem since even very weak rates of growth will swamp the impact of demographics.)