Productivity & Unemployment

Mickey Kaus wonders how productivity growth and decline can both be bad for the economy:

Gloouis Uchitelle states the full underlying NYT breakdown theory, in which rapidly rising productivity is bad because it means fewer workers are needed to meet a given level of demand. I can see that. But Uchitelle loses me when he switches to arguing that it's also bad if productivity fails to rise rapidly. Up-bad. Down-bad. Capitalism can't win with this guy. Do "most economists" agree? ...

The answer depends upon whether one's looking at the short- or long-run. Here's an explanation from the most recent edition of the Economist [subscription required]:

In the long run, productivity growth is the single most important economic indicator. Faster growth not only boosts living standards, but should also help, eventually, to reduce America's ballooning government budget deficit through higher tax revenues, and make it easier to pay tomorrow's pensions.

But..

If productivity grows by 2.5% annually and the labour force expands by 1%, then the economy can look forward to long-run annual GDP growth of 3.5%. However, if growth is less than this, unemployment will rise. In the long run, faster productivity growth is obviously good for the economy. But in the short run, if it leads to further job losses, there is a risk that worries about jobs could severely dent consumer confidence and spending, a mixed blessing by any measure.

So, short-term unemployment pain, long-term output gain (with its attendant benefits).

Comments

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