Productivity vs employment growth: a zero-sum game?

All economists know productivity matters. But they also know it isn't easy to measure, nor to explain the often large and persistent productivity gaps between nations. A new paper by Harvard's Ian Dew-Becker and Northwestern University's Robert J. Gordon makes a provocative contribution to the productivity debate. Presented at a meeting of the NBER Program on Technological Progress and Productivity Measurement in Boston last week, the authors argue there is a "strong negative tradeoff between productivity and employment growth". The abstract from their paper, The Role of Labour‐Market Changes In the Slowdown of European Productivity Growth (PDF), continues:

We document this tradeoff in the raw data, in regressions that control for the two‐way causation between productivity and employment growth, and we show that there is a robust negative correlation between productivity and employment growth across countries and time. We simplify the task of explaining intra‐EU differences in the performance by reducing the dimensionality of the issue from the 15 EU countries to four EU country groups, chosen by geography.

We provide a comprehensive analysis of the role of policy and institutional variables in causing changes in productivity and employment per capita growth across these country groups. Using both a calibrated theoretical model and several reduced‐form regressions, we document the strong effects of European policies that raised labour costs, such as the tax wedge, employment and product market regulation, unemployment compensation, and union density, in causing employment to fall and productivity to rise before 1995, and for this process to be reversed after 1995.

The policy implications of their research are stark:

The strong evidence that we find for a productivity‐employment growth tradeoff changes the questions that European policymakers should be asking. They should no longer ask how they should boost productivity growth or raise employment growth. Most policies will push productivity and employment in opposite directions, and we have shown that these offsetting effects make the effects of policies on growth in output per capita ambiguous. Our new policy framework suggests that policy changes be assessed as much on their effects on government budgets as on productivity or employment, since the productivityemployment tradeoff causes some policy changes to have a negligible effect on growth in output per capita.

I'm not sure I'd necessarily agree with the authors 'zero sum' conclusions. There are for example some economies which perform better on both productivity and employment growth than others; so it's not always such a direct trade-off. One implication - that higher employment rates or higher productivity in large part reflect different national preferences - has certainly been argued before. But if their general 'zero-sum' argument proves to be more the rule than the exception, it has profound implications for policy makers throughout the OECD - especially in Europe.

Comments

[S G]

i think it is obvious such results will be true in the short term. If for some reason employment doesn't grow then the current employees are squeezed more and produce more output. But this cannot be a recipe of long term growth in productivity, such a growth can only come through real technological and organizational advances in companies...

[s]

interesting to consider the US as being the shingin light for productivity AND employment growth. I wonder what the employment numbers would look like sliced two ways: an index which weights jobs and average income (somehow - with the likely outcome that new jobs are being gained but they are marginal new jobs - govt, healthcare, steachers etc...) and also what would the productivity emplyemtn curve look like if we strip out .com and say normalize the real estate/construction/mortgage industry over say past five years. I would add that the dead weight losss from real estate commisisons is enormous and that is a bsuiness model that needs to be disintermediated rapidly, with the help of goverment if need be.

[Ian D-B]

It turns out that the US is not a good example of high productivity and employment. In the paper we show that US employment growth actually slowed substantially following 1995, while productivity picked up. It's certainly the case that productivity growth would have accelerated even without the decline in employment, but it was a help. The explanation for *why* employment growth in the US slowed is that for a long time, we benefited from women entering the labor force. In recent years, that has stopped (see the discussion of the weak recovery in employment coming out of the last recession). On the other hand, it seems that women are working more in Europe than ever before, which has raised employment growth there and held down productivity.

[Arthur Eckart]

In the late '90s, the U.S. was operating with economic strain, i.e. actual output exceeded potential output, which would slow employment growth. Also, in the late '90s, more Baby-Boomers were entering "prime-age," which would increase productivity. After the quick and massive Creative-Destruction process, mostly between 2000-02, productivity increased, while employment growth slowed. Throughout the 2000s, the U.S. was generally operating with economic slack, i.e. actual output was below potential output, which would increase productivity with slower employment growth. I suspect, over the next few years, the Baby-Boomers will work longer or harder to pay-down debt and build-up saving, which will increase productivity, since the 55-64 age group is the second most productive group (based on education, experience, and training).

[KIO]

Not reading this paper I found somewhat similar results for a cross-country comparison (developed countries) Actually, ratio of productivity, P, and participation rate, LFPR, is developed countries is scalable with a power law with index n. So, any difference in productivity between two countries can be explained using the change in corresponding participation rate:

P1/P2=(LFPR1/LFPR2)**n

with between 1 and 5 depending on the pair of countries.

I tested US, UK, Japan, France, Italy, Canada, Sweden

Illustrations and brief explanation in:

Some myths about the slowdown of productivity growth in the USA
http://inequalityusa.blogspot.com/2007/10/some-myths-about-slowdown-of.html

[Arthur Eckart]

Kio, I don't know how you can make that assumption: "There is no change in productivity related to technological shocks," e.g. without differences in hours worked. Also, the Gini Coefficient is a limited and relative measure of income inequality. If disposible income, consumer surplus, consumption patterns, etc. were included, you'd likely find living standards are higher and perhaps less unequal in the U.S. than in the E.U. The Gini Coefficient penalizes the U.S., because the number of higher income earners are increasing at a much faster rate than the U.S. population growth rate.

[kio]

Arthur,
Logic is simple. If all the changes in (relative)productivity are explained by the change in (relative)labor force participation rate, then nothing else matters.
Gini is a long discussion. I wrote couple papers on estimation of gini ratio related to income distribution as measured by the US Census Bureau and its difference from the IRS. This is a quantitative analysis, so I can not answer your questions in the same manner. I have just numbers and estimates of their standard deviations. My statements are very narrow and are associated with quantitative estimates.

[Arthur Eckart]

Kio, your chart shows dollars per hour. So, number of hours worked would be relevant.

[kio]

Well, it is difficult to say. I would prefer $ per hour as the best proxy. any other variable is not justified by theory since includes population difference.
so, if something fits another variable it is a good news.

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...like in Rwanda & Darfur... does the economist ever consider who they want to be, or the Society in which they wish their children to live? Shock Doctrine

There is enough for everyone... just depends on who defines 'enough' & who defines 'everyone'. The question is sustainability.

ZSG: a convenient excuse to engage in hate, hoarding, "Halleleuiah".

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All economists know productivity matters more for living standards than just about anything else. But they also know it isn't easy to measure, nor to explain the often large and persistent productivity gaps between nations.

[oyunlar]

There is no change in productivity related to technological shocks

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