Don’t blame the robots: It’s not productivity growth that’s holding job growth back

The Wall Street Journal ran an article a couple of days ago implicitly arguing that accelerating productivity growth is a prime reason why labor market recovery from the Great Recession has been so sluggish. Another reporter asked me about it yesterday, so I figured I’d write up a couple of thoughts on it.

First, we should be clear that the pace of labor market recovery since the Great Recession has not been uniquely bad; since the trough of the recession, private sector employment growth has actually been exactly in line with the (admittedly too-slow) recoveries from the recessions of the early 1990s and 2000s. Overall employment growth has actually outperformed the recovery from the early 2000s recession. Figure A below shows the trends for private sector employment. Note that the jobs lost during the latest recession dwarf those lost during other recessions – but since the official recovery began, job growth has been on-par with recent recoveries. Note that policymakers should not be graded on this generous curve – it’s a disaster that we haven’t had a better recovery from that perspective. But one doesn’t need to generate new theories to explain this allegedly atypically bad recovery – it just hasn’t been atypically bad.

Second, and in line with Dean Baker’s response to the article, productivity growth has not been particularly fast since the Great Recession. Figure B below shows the behavior of productivity averaged over all recessions between 1947 and 1981, the average of the early 1990s and early 2000s recoveries, and growth since the Great Recession. So, again, one cannot argue that fast productivity growth presents unique challenges in the current recovery since its performance just hasn’t been all that unique.

Lastly, and maybe wonkiest, fast productivity growth doesn’t change the validity of Keynesian diagnoses of what the economy needs at all. In fact, it would just strengthen them. The root of the Keynesian diagnosis is that there is a large gap between aggregate demand and potential supply in the economy – or, a large “output gap.” Figure C below shows the problem – the large output gap between actual and potential GDP is the reason why we have such high unemployment today. Productivity growth just pulls the potential GDP curve upwards, which means, all else equal, that the output gap will rise (on the chart I illustrated this with the “actual, if productivity growth accelerated” line).

But, the obvious solution to this problem is simply to push up demand to make actual GDP equal potential GDP again. Basically, accelerating productivity growth would just make measures to boost demand more necessary, and would insure that no adverse supply-side response (say accelerating inflation or rising interest rates) would kick-in.

The root cause of today’s underperforming economy remains insufficient spending by households, businesses and governments to fully employ all those who want a job. And the cure for this is simply policy measures to boost spending. Yes, I’m sure this has gotten boring for many economy watchers who want newer and more exciting diagnoses and cures, but sometimes what’s true is pretty boring.

One quick thought on why explanations based on productivity growth can sound convincing: At any point over the past century you could have walked into a factory and been told about the big technological improvements that had been made over the past four years. If you’re a business writer who walks into a factory today looking for a root cause of the labor market’s doldrums, guess what? You’ll be told about the big technological improvements made over the past four years, and then you might think, “hey, that’s why the jobs aren’t here!” But, if you had walked into a factory in 2000 – when the unemployment rate reached 3.8 percent – You also would’ve been told about an amazing four-year run of technological advance. In the end, high rates of unemployment are about demand falling short of supply, period.

  • CorneliaStrawser

    Maybe one reason demand falls short of supply is weak worker income growth.  In the 2000s, private-sector labor incomes–including the costs of health care and other “fringe” benefits–have not increased in step with productivity, due to a falling labor share of the value of business output.  (See “The compensation-productivity gap” in January 2011 Monthly Labor Review.)  One reason for the falling labor share is that the financial sector, which doesn’t pay out much to workers despite the disproportionate payments to top executives, is claiming an increasing share of business GDP.  Can it be that structural reforms that diminish financial manipulations will also help aggregate demand?

  • Bill

    Nice summary – too bad the current admin has been so slow to see this (if they even do now)

  • benleet

    Aggregate income from wages and salaries are at record levels, read the following from Floyd Norris, 11.12.11, NYTimes article: 
    Wage and salary income was only 43.7 percent of G.D.P., the lowest number for any period going back to 1929. That figure first fell below 45 percent in 2009.Compared with the final three months of 2007 — as the 2007-9 recession was beginning — wage and salary income was just 1.8 percent higher in the third quarter of this year. By contrast, overall corporate profits before taxes were 35 percent higher. With estimated corporate taxes just 1.5 percent higher, after-tax profits were up 49 percent. Those figures are not adjusted for inflation. My note: corporate profits are at levels not seen since 1960 or ever. Also the growth in wage income reflects increases  in the top-earning percentiles. My calculation, from State of Working America, 2007, page 79, shows that 28.2% of all personal income goes to wages and salaries of the lower-earning 80% of households. This comes from a Tax Policy Center document, per citation on page 79. This is a picture of a sick dog economy. I like Nouriel Roubini’s paper “The Way Forward” at New America Foundation for a balanced reform  program to pick up the economic growth. My blog is for more bad news, regrettably. 

  • Rjena

    Looking at the actual and potential GDP, I tried to change that with the present VP of USA, but they had different plans and hence nothing happened, and it is now worse for the next 5 years…watch the revenue generation since 2001 and what it should have been.

  • hansenabcd

        Right on. Inadequate demand is clearly a key problem. However, in line with your excellent work on the topic, this would have been an excellent opportunity to note that the overvalued USD is a key driver of inadequate demand for American products and thus for American workers.
       Because of our overvalued dollar, we buy imports instead of demanding domestic output. Because of our overvalued dollar, foreign demand for our products is way below what it could be.
        As a result, we have been running serious trade deficits for about 20 years. Despite lower deficits immediately after the 2008 meltdown on Wall Street, deficits are again climbing. The IMF estimates current account deficits for the United States of about $470 billion for 2010 and 2011 — and merchandise trade deficts will be considerably higher than that.
        Each billion dollars of external deficits kills about 10,000 jobs for American workers that would otherwise be producing exports and import alternatives. This means that nearly 5 million American workers have been put out of work by the overvalued dollar. 
       Yes, we need more demand, but it cannot and should not be driven primarily by excessive monetary and fiscal expansion. Instead it should be driven by increased demand for American-made import alternatives and for American-made exports to foreign countries. This demand is best driven by a more competitive exchange rate for the dollar.
       America needs a more competitive dollar – now!
    John Hansen, PhD
    World Bank (retd)