Tuesday, May 26, 2015

Lesson 3 Productivity: Not Such a Mystery

Alan S. Blinder wrote an article a couple of weeks ago in the Wall Street Journal called “The Mystery of Declining Productivity Growth ” (May 15). Who doesn’t like a good mystery? So I picked up the article and started looking for who killed Cock Productivity.  And then it hit me. This could be Lesson 3. All of you HomeEc majors are going to love this one.

Now that you have GDP under your garter belt it is now time to master another macro indicator, productivity. And it is a good one to master. Productivity is important, misunderstood, and controversial. And because productivity is the result of dividing two numbers, it is arithmetically challenging.

Productivity is important because it is a key driver of a nation’s output growth. We all have t-shirts that say Go Growth because we have fallen prey to this macro mantra. Recall that GDP is like a mountain of stuff. We like the mountain to get bigger each year. Macro says it gets bigger each year if we have one or more of the following:
            More labor producing stuff
            More capital (plant, equipment, software, etc) producing stuff
            More Productivity (Better ways of producing so that using a given amount of labor and capital gives you even more stuff)

Productivity is misunderstood. First, it is defined as output per unit of labor input. (Note: for those of you who know the difference between a two-factor and a one-factor production function please ignore my using labor productivity rather than total factor productivity. It seems easier to discuss this topic using labor productivity. I realize that technically it is not correct. But it does no harm for my purposes here).

To calculate productivity you therefore have to divide output by the number of labor inputs. People love rising productivity as much as a grilled cheese sandwich on white bread. Suppose Lila goes to a yoga camp and comes back to the factory all stretchy and happy. Her experience at that yoga camp means that Lila can now produce 10 Nehru jackets each day instead of her former best output of 7. She is still just 1 worker – but now her productivity is 10 instead of 7.  Her boss, Mohammed, is quite happy with this result. Getting more work out of Lila and paying her the same means Mohammed can afford more chicken wings and wheat beer at the Upland Brewery on Friday night. Of course, since Lila can produce so much more in a given day, Mohammed has other choices – he can reduce the price of his Nehru Jackets and/or give Lila a pay raise.

Do you see why we like productivity to increase? Workers who become more productive lead to higher output, higher profits, higher wages, and lower prices. Slower growth or lower growth of productivity is not good and leads to the opposite. So companies and countries try very hard to improve worker productivity.

Rising productivity is good but it is pretty complicated. A second reason for misunderstanding is that if Lila can produce so much, maybe old Mohammed can fire Adore, her co-worker who has been known to read Herman Hesse novels on the production line. That doesn’t sound so good. Higher productivity can lead to a reduction in employment. Some of you are old enough to recall when the tractor replaced the horse.  A lot of horses and agricultural workers got replaced when tractors increased the productivity of Ag workers – the ones who could master those new-fangled tractors.

Like Hillary Clinton therefore, productivity has a checkered past. This leads to controversy. One controversy has to do with the question of employment. Some productivity gains are very bad for some workers who get displaced by the new technology. But recall – stronger productivity also means more output, increased competitiveness, higher wages and so on.  The higher output can lead to more employment. A new technology causes an initial employment decline and it may take years before the output effects generate more employment. So it is a tough call for politicians to actively promote increased productivity – even though it is the key way to increase GDP for the future.

Okay we are almost done and it is getting close to 5 PM and I can hear JD screaming for me. Here is where we get to the mystery, whodunit, and then the solution. Alan Blinder notes that productivity growth slowed in the USA since 2005. It is barely crawling at 1.3% per year compared to a rate of 2.9% before that. You used to be able to dunk the basketball. Now you can barely touch the bottom of the net using a trampoline. This is a serious decline.

Blinder in his Alan Blinder sort of way says this is both a problem and a mystery. We should solve this mystery. But in my humble opinion Prof Blinder may have been spending a little too much time lately in Colorado and Washington State. He lays off this mystery to things like getting free services off the Internet and how much of the current tech boom (Facebook, Twitter, Snapchat) creates employment but not much output. He also says that businesses are churning less and that means less output from entrepreneurs.

There might be some truth to Blinder’s story but being one of the liberal persuasion it seems that Blinder simply does not want to admit to a whole other set of factors that might be important enough to have cut productivity growth by more than half. These items are not a mystery. Two recent articles offer a totally different view from Blinder– and suggest that the mystery is not very mysterious.

Martin Feldstein writes “US Underestimates Growth” (WSJ 5/19/15) and concludes that measurement problems during a time of rapid technological change underestimate GDP. The output and productivity are there – it is just that the government’s methods to measure them are not flexible enough. Feldstein goes on to say that approaching the productivity problem needs to address why firms are not buying more capital, why workers are not joining the labor force, and why smaller firms are not innovating. His advice is to focus on reducing tax disincentives and reforming taxes so firms want to invest and workers want to work. This,of course, is basic supply-side economics.


Dan Mitchell’s conclusion is pretty obvious from his title. “Big Government Is an Anchor on America’s Economy, Undermining Investment and Wage Growth” (WSJ May 16, 2015). Mitchell focuses on the thousands of new regulations imposed on financial, banking, and other firms in the years since 2008. These regulations create additional costs and uncertainty that prevent firms from expanding more and from workers actively seeking employment. 

Feldstein and Mitchell emphasize productivity problems that seem pretty obvious. I am not sure why Blinder sees this slowdown as such a mystery. Maybe his ideology does not include supply-side solutions and this we are left with mystery. I wonder what Sherlock Holmes would say about all this. 






26 comments:

  1. The latter two men are more correct than the first. My smart phone is equal to two administrative assistant. . When I get the call center in India for my smart phone made in China I see another labor replacement...or two. There is less participation in the workforce because there are less jobs ...That is pretty simple. Less people with the help of better technology produce what more people did without it. If citizens buy the same or less than they did 10 years ago in real dollars because their wages are flat because the demand has shifted for labor due to increased technology and off-shoring lower level jobs then that affects demand for production products. If the cost of products is higher than one can get for an import then then the consumer buys the import.

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    1. Productivity has generally been a positive forth for employment. I am sure you don't want to go back to a world with typewriters and horse drawn plows. It may take a while before the quality of jobs catch up but history suggests it will. While offshoring is a factor, the US leads in so many categories that it is hard to imagine that we won;t see the positive impacts here. Of course if policymakers enact legislation that hurts US companies then they may make it harder for good jobs to grow here. In this world we need companies to be more competitive and policy should support that.

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  2. Dear LSD, "Elementary, my dear Watson," was never written by Sir Arthur Conan Doyle. But, Blinder’s (your fav liberal piñata) ‘splanation of the problem/mystery is well, rather, elementary economic/liberal rationalization. As a doo-da who prefers simplicity, I see the problem/mystery of low productivity simply as a function of slack demand relative to employment. Employment is grudgingly coming back to 2007 levels but demand is not. So, the denominator is increasing slightly but the numerator is increasing at a slower rate because bidinessess are producing just enough inventory to meet lackluster demand. If the economy were chugging along at more than 2% we’d probably see a jump in productivity.

    I am partial to Mitchell’s ‘splanation that big govomit anchors down the economy by stifling bidnessess’ incentive to expand. But I wunner if without the heavy regs would bidinessess expand facing weak demand? Excess labor supply, low inflation, and low productivity have kept pressure on wage growth down. So, while there might be a mystery about how to account for social technology’s contribution to employment/growth/GDP/et al I think the more simple ‘splanation to the productivity conundrum is that the economy sucks, consumers’ wages can’t afford budinesses’ output, the Internet’s contribution to productivity has peaked, a unit of service adds less value than a unit of manufacturing, and the education system hasn’t produced grads that can convert ideas to sales other than to flip burgers and change diapers. There, that ought to do it: A simple but elegant ‘splanation Mr. Holmes would find alluringly elementary.

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    1. Not bad Tuna but your story needs one more piece. The drop in productivity as you point out has output growing less than employment. Given that employees are not free why has business been more willing to hire than to produce? If I was worried about future sales I would want to economize on labor...

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    2. Dear LSD. The answer is elementary. Budinesses don’t need to economize on labor because labor is cheap . . . the labor supply is greater than demand for it . . and part-time/contract labor is an alternative that further mitigates hiring costs. It’s like China twenty years ago . . . it’s labor supply was almost infinite . . no need to economize there . . . just throw a few more bodies in at almost no incremental cost per unit. Labor might not be free, but at the moment it’s relatively cheap.

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    3. I get your drift but your answer is lacking temporal change. At some point we have a change in output. Call that from 2009 to 2015. Then you measure over the same time period the change in employment. Even if labor is cheap or free, you still need to explain why during that period they hired proportionately more labor. If you don't need proportionately more labor to produce proportionately more output, then why hire them at any price? Labor hoarding?

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    4. Dear LSD. I don’t believe that labor and output move proportionately . . . rather, the relationship is similar to investing in overhead/capital at intervals (assuming labor cost is fixed) . . . a bidiness doesn’t invest in OH/capital linearly. It increases investment incrementally when the ROI justifies the increment. GDP went up and down during ’09 and ’15 (adjusting of course for adjustments . . . ) so maybe bidinesses hired according to GDP rosy forecasts (e.g. Biden’s umpteenth forecast for the “summer of recovery”) therefore ‘splain’n the “proportional” increase in hiring relative to output.

      Labor hoarding? That seems counter intuitive given the increasing cost of employment due to Obummercare.

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    5. Business believed Biden's rosy forecasts?

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    6. Dear LSD. Ya mean YOU didn’t believe Joe the clown?

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  3. If we accept the government's data that says unemployment is somewhere south of 6%, we must also accept it's data that says that average annual household income is down by about $2700. We've hired more but have paid them less for their work. So, where's the productivity "mystery?" Blinder needs to take his off.

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    1. The mystery is why firms would hire more workers and not get a proportionate increase in output.

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  4. Do ya think that they "really" haven't hired more workers? That those thousands of "new jobs" the administration takes credit for creating really aren't new jobs at all?

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    1. So the productivity puzzle is the result of the government faking the jobs numbers?

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    2. Partially, yes. Every administration since Washington has played with the numbers to make itself look good in the shower.

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    3. My economist friends at the Department of Labor would not like your comments very well. It is one thing to say that politicians put spin on the numbers but another to suggest that the professionals who put out the numbers would participate in a fraud. I know them too well to believe the latter.

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    4. Putting spin on the numbers by an administration has nothing to do with the bureaucrats who dredge up the numbers, but if I were one of the pros who put them out, I would be incensed by the way the administrations spin them...when did we change the word "lie" into "spin?" Notice, I pointed my finger at the administrations not at the people who put out the numbers. Lets sing from the same sheet of music...well, maybe not.

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    5. Some people don't fully understand the difference. Especially since there are departments within government that sometimes get political as in the IRS, Energy department, etc. That behavior taints their reputations. The BEA and the Labor Departments as far as I know are mostly technicians who pump out numbers. They probably don't like any of the Presidents since the data guys are scientists and Presidents are well politicians. Many have served for decades and have seen Presidents come and go...

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    6. Having crossed swords with a 40-year bureaucrat at the 5-Sided Puzzle Palace, I can testify that longevity is not always beneficial to the government. "We've always done it that way" is one comment sure to get my hackles up...and you won't like me when my hackles get up.

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  5. Dear LSD. Da govomit fak’n numbers? Ah-g-g-g-g-g-g, tell me it ain’t so, Joe! At a minimum da numbers are subject to revision—who knows, a revision might show an explosion of productivity. Regarding da mystery—insight might be gained if the dynamic of part-time/contract workers were considered. E.g. would/do part-time or contract workers have a mitigating effect on productivity—since Biden’s continuing rebound has resulted in extraordinary hiring of them.

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    1. Productivity is output divided by employment. Employment includes contract and part-time workers. You are drawing a conclusion that these workers are less productive than the same hours by a full-time employee. Sounds intuitive but not so sure it is true. Are you really so sure that firm's would be motivated to hire people based on something said by Joe Biden?

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    2. I’m not concluding that; only offering a possible solution to the mystery.

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  6. If the majority of voters (including multi-double-dippers and the deceased) can re-elect an empty suit why is it questionable that bidinesses would not believe Joe the clown?

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    1. I was always taught that business people try to maximize profits or something like that. Basing business decisions on silly politicians silly pronouncements is not a great way to maximize.

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