...against fictions and other tall tales

Tuesday, 26 June 2012

Employment and productivity growth

Like clockwork, the National Post published yet again another article pointing out the bafflement of economists toward Canada's stubbornly weak productivity growth.  Of course, the dismay of economists is easily understood.  As the article points out, for years economists prescribed – and were able to persuade federal and provincial authorities to adopt – a series of remedies deemed necessary to improve the competitiveness of industry, including tax cuts, deregulation, free trade, low and stable inflation, government debt reduction and low interest rates.

All of these initiatives were intended to minimize the cost of business inputs, help the business sector become more competitive and improve overall productivity.  Essentially, the focus was on putting forth a set of so-called "market-friendly" policies that would provide the incentive for firms to operate in a leaner manner and to increase output.

After over a decade of considering productivity mainly a microeconomic problem and putting forth these "market-friendly" policies, it's safe to say that this approach to boosting productivity has been a failure.  And there is even evidence that the route taken by policymakers has been ill-advised.  Take, for instance, this excerpt from the 2007 OECD Employment Outlook, which offers a skeptical view on the effectiveness of these types of policies on productivity growth:
It has been claimed by some that only countries which emphasise market-oriented policies (characterised by limited welfare benefits and light regulation) may enjoy both successful employment performance and strong labour productivity growth simultaneously, unambiguously improving GDP per capita. This claim is not supported by the evidence in this chapter, however. (2007) (emphasis added)
Contrary to the microeconomic/market approach, my take is that productivity is very much a macroeconomic issue.  In this regard, I side with post-Keynesian economists Nicholas Kaldor and Robert Eisner, both of whom argued that the level of employment and the degree of competition in labour markets have an incidence on productivity and overall growth.  James Galbraith summarizes this point succinctly when he argues that
...full employment production foments ample competition in product markets, high rates of technical change, and declining costs, as business seek ways to save on scarce and expensive labor.  In other words, productivity growth accelerates because of full employment itself. (emphasis added)
Now, it's important to recognize that employment growth irrespective of the type of employment probably won't do much to increase productivity.  As highlighted in the OECD report cited above (and implied in the quote by Galbraith), the type of employment growth is a critical factor impacting on productivity.  For this reason, it is best if policymakers seek to prioritize employment growth in the manufacturing sector, the sector that is most amenable to improvements in productivity (see here for more on why manufacturing matters for productivity growth).

Furthermore, in the case of Canada, there is now evidence that the slowdown in productivity during the last decade – of which half originated in the manufacturing sector – was mostly caused by lower levels of capacity utilization (Baldwin et al., 2011).  From an exports standpoint, this means that growth in productivity could be achieved by increasing the external demand for Canadian products via a more competitive exchange rate. 

  • Galbraith, J.K. Fed Ache, Washington Monthly, July/August 2004


  1. Great post as usual. One wonders why the 'working person' is such an anachronism to modern society.

  2. So increasing the wage bill will boost productivity? More workers for the same amount of work. Am I missing something?

    1. Anon, thanks for opportunity to clarify. I find the point is well captured in the James Galbraith quote. Essentially, the mechanism through which employment growth produces productivity gains can be stated as such: tighter and more competitive labour markets act as an incentive to firms to enhance profitability through capital investment (e.g., acquisition of new machinery and equipment), workplace training, improved work processes, etc.

  3. Again, I thank and commend you for keeping foreign readers in touch with what economists are thinking north of our borders. That you should address one of the two critical issues of our time: productivity (employment being the second) as factors of growth is no surprise. It is refreshing to know that someone is thinking and watching for the many, while the banal gets discussed o'er volumes of monetary policy when there is little left it can do to dissipate the dilemmas of better policymakers. Mr. Bernanke has done almost all that is possible and oratorized to Congress often enough, but a heedless Congress is difficult to energize, especially in the last laps of a presidential election process.

    I do however sympathize with the lot of most economists that now recognize that the success of 'long term' growth lies in embedding a culture of productivity. I don't sympathize with some of that lot who are surprised by that epiphany. One wonders, especially among Canadian economists, how the caution by one of their own Jacob Viner could be forgotten: "No matter how refined, how elaborate the analysis, if it rests solely on the short view it will still be...a structure built on shifting sands" (The Long View and the Short:...) More astounding is that the community has forgotten the cautions and cues of perhaps its the most dynamic proponent and historian of 'productivity growth' Bill Baumol, who did not fail to incorporate the fastidious Canadian in his own work. It's critical to sound alarms, as you are doing, to startle complacent and vexed Governments in the wake of a tiring doldrum like the one that is hovering globally and will continue to hover political economies for the next few years unless timely interventions on job creation and productivity in manufacturing are implemented.

    Would that economists stop the bickering about the financial system (enough has been done to render it repetitive) and focus on industrial policy and effective social programming.


  4. GC, I appreciate the comments! No discussion on productivity is complete without a mention of Bill Baumol. In fact, my take on productivity has been influenced by his view on the matter. I particularly appreciate his take on the popular theme among politicians and commentators that decent health care and education are "unaffordable" in the long term. As Prof. Baumol argues, this all depends on productivity growth and the forces of competition that drive innovation and growth (I would also add the policy measures in place intended to promote such growth). These ideas were floating in the back of my head when I wrote my column on the impact of the aging of the population on Canada's public finances back in February.

    Also, I would agree with your comment that productivity and employment are the two critical issues moving forward. In fact, the title of my post was meant to emphasize it. Simple but effective! One of the goals of this entry is to demonstrate that both are linked.

    As for monetary policy, we read today that the BoE is now more likely to move forward with additional stimulus. This is somewhat unfortunate, seeing as they are a sovereign issuer and do not face the same constraints as Europe in regard to fiscal policy. I wonder if someone with influence will advise Cameron et al to change course. BTW, 2012Q1 would have been worse in the UK had it not been for the large increase in public sector spending during that period.

  5. The hypothesis that full employment promotes productivity and therefrom a respectable level of economic growth is challenging. The main hurdle is that the empirical evidence is not yet assembled for this multivariate phenomenon. Even Keynes who promotes the credence would tread lightly in that regard. However, policy is the 'pragmatics of the possible':- the opportunity of endorsing the 'possible' solutions. To some extent, most of Kaldor's work was very hypothetical even C-cubed. On the other hand, no one since has advanced a better thesis, nor challenged seriously the position.

    Your reflection is really about growth in productivity ensuing from full employment and the overall result of this effort on economic growth. In this context, I welcome the cautions of Baumol's long view (tks GC for the recall lol) which suggests that technology (growth, progress) may not necessarily and unfortunately convert into job creation. But then policy is about 'pragmatics' .
    and there is very little more pragmatic from an economic perspective than creating employment opportunities, and nothing more complex than doing so while promoting innovation and a semblance of good capitalism in a world defined by convergence.

  6. Productivity, one of my favorite topics! Swells, I agree with the view that there are no endogenous market mechanisms that reduce unemployment caused by productivity growth. Technological unemployment has to be addressed. I think your take here is right on: growth is critical. Specifically, this means that real earnings must increase along productivity growth to keep employment from falling. Also, the level of expenditures can't fall either. In addition to the beneficial effect of full employment stated in my post, I would add that full employment tends to place workers in a more favorable bargaining position relative employers in terms of securing higher wages in a context of productivity growth occurring during expansions. Of course, the reverse is also true, as we are seeing now in many parts of the world: higher productivity resulting from cost-cutting measures undertaken by firms during slowdowns and stagnant periods is to the detriment of workers' earnings.

    That said, the hurdle you point out is a challenge. In a way, I am somewhat encouraged by the fact that the other measures have already been tried. This might lead some of the more enlightened decision-makers to venture along unbeaten paths.

    Just to add to these points and the key issue of incentives stated in my post, I think this quote by Joan Robinson also drives home the point quite well (as well as adds another important facet):

    "The rate of technical progress is not a natural phenomenon that falls like the gentle rain from heaven. When there is an economic motive for raising output per man the entrepreneur seek out inventions and improvements. Even more than speeding up discoveries is the speeding up of the rate at which innovations are diffused. When entrepreneurs find themselves in a situation where potential markets are expanding but labour is hard to find, they have every motive to increase productivity"

    From "The Accumulation of Capital" (1956:96) - required reading for all!

  7. Good stuff!

    This type of material is definitely a compliment to the type of stuff i'm learning in my ECON class.

    i'm happy one of my classmates told me to check it out!

    Keep up the great work!

  8. Circuit and JL!! Very well done. I would simply add four bookmarks to your shelves (which you certainly have) for some of your readers or linkages: four by Olivier Blanchard, and others:
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1555117. Brilliant work. It complements your previous insights.
    http://economics.mit.edu/files/1909. Different schools make for great cautions for long and short views.
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=920959 Gali is an important thinker in the niche.
    http://economics.mit.edu/files/742. A gem to be appreciated. Brilliant loner by OB. Sets the bars.

    1. Thanks MI for posting. All are excellent and the last one really is a gem!

  9. the post addresses two critical and closely interrelated issues in public policy. it's commendable to this post's reader roster that all agree that the work of policy is in dealing uncertainly with a society's future, and good public policy is evaluating the tradeoffs of attempting the optimal to resolve the undesirable actual or probable. the theoretical ideal is surely fathoms away from the real world's challenge. the undertone of Keynes's distinction between theory and policy, and no one stipulated the challenge as well as Keynes himself. i add a few bookmarks from Keynes to highlight that cautions do not imply shortcomings but rather signal the quality of the challenges.
    from the early Tract (1923), as a complement to the well-toned aphorism of what happens 'in the long run'. Good Policy must reconcile the long and short view and "When, therefore, we enter the realm of State action,everything is to be considered and weighed on its merits" In most cases, "We do not know what will be the outcome. We are-all of us, I expect-about to make many mistakes." (1933). finally the boldest because it strikes the sometimes adventitious character of policy "Yet the new economic modes, towards which we are blundering, are, in the essence of their nature, experiments. We have no clear idea laid up in our minds beforehand of exactly what we want. We shall discover it as we move along, and we shall have to mould our material in accordance with our experience. Now for this process bold, free, and remorseless criticism is a sine qua non of ultimate success. We heed the collaboration of all the bright spirits of he age." (National Self-Sufficiency 1933-an inspiring read on the nature of economics and policy, a reckoning of pragmatism).

    as an addendum, recall that Keynes 'presided' over the Macmillan Committee on Finance and Industry (1929) which sourced his later Treatise on Money, and by no mere chance did he predicate throughout those conversations enterprise/investment as a more credible solution to crisis than banking/saving.

  10. It was a pleasure to read the post and comments on productivity and employment. I welcomed circuit's prioritizing productivity (GC pickup) and agree with MI that Blanchard is a foremost avantgarde thinker, unscrupulously and trivially repudiated by an extremely feeble readership. He reflects well the collage to Keynes that if the facts change, one should change one's mind. But Blanchard never changed his mind; he refined the dimensions of appropriate policy discourse. Would that the pop and academic economists do the same. Isn't that the nature of policy; isn't policy an exercise in brinkmanship when a crisis surfaces, and isn't brinkmanship rethinking the optimal alternatives, (spare us the analysis of the semiotics of brinkmanship).

    Reading over the post and comments, considering the European and global convergence of slowdowns (I recommend Wilensky's 2003 classic on global convergence-a sub-narrative that is developing into a master narrative), I am reminded of the type of leadership that emerges and deliberates in times of crisis.

    To your Keynesfest on productivity and unemployment, I offer the great exchanges Churchill and Niemeyer in 1925 -foreboding so well the absurd European theatre of 2012(bracket the gold paradigm) embedded with its less-than-able leadership. Moggridge's British Monetary Policy 1924-1931 (p75ff) -a magnificent compendium, highlights Churchill's reflection on desired economic drivers in times of unemployment in the context of an unclear monetary policy in a declining British Empire. Swells will recognize the BofE's 'experiments' and shipwrecks, and to JHCraw and GC, I add the complementary quote, this time by Niemeyer to Churchill (Niemeyer,a former Keynes critic) concerning policy optics " The real antithesis is rather between the long and the short view...Bankers on the whole take longer views than manufacturers." Swells will certainly recognize the sirens!and the incisive minds! and how the facts have changed!

  11. @DES but didn't Churchill himself doubt his decision at the time:"We are often told that the gold standard will shackle us to the United States. I will deal with that in a moment. I will tell you what it will shackle us to. It will shackle us to reality. For good or for ill, it will shackle us to reality. That is the only basis upon which we shall be standing, and I believe it to be the only basis which offers any permanent security for our affairs. That is my first broad reason. The foundation of Great Britain's economic policy must be, as far as possible, based upon reality." http://www.winstonchurchill.org/learn/speeches/speeches-of-winston-churchill/115-gold-standard-bill

  12. good link. Indeed, Churchill acknowledges he blundered. That's the irony. I may have sounded cynical but didn't intend the hippocratic humour, and shall avoid literary licence in the future. He had all the arguments to counter Niemeyer's pitch in favour of the prevailing paradigm, yet threw in the towel with Treasury. The most evident is in your referenced speech. Churchill acted politically as Germany is acting politically at this moment. Yet that is part and parcel of public policy. Moreover, Niemeyer dispensed with the fact that Britain's economy was not a closed system so IR management, contrary to currency management, which evidenced problematically at the time, led to a deflationary spiral that according to some entailed the great Depression. British Treasury was more concerned with the perception it gave of its role and the BOE as senior banker, its Pound vs USD as a dominant currency and its economy as a major driver of world trade. All misperceptions. Churchill's was an experiment bound to fail, an incredible shipwreck foreknowing the obstacles, and the sirens-national pride, vested interests and a sense of hegemony depleted the common good and caused rampant unemployment as wages plummeted.

    EuroZone's situation, excluding gold paradigm, is very similar macroeconomically to the situation that surrounded Churchill's decision in 1925. Obviously, there will be no rush to gold; but there is no urgency to salvage employment, and spur productivity.

  13. Thanks DES and Craw. Another interesting element is that, according to Skidelsky, Keynes never blamed Churchill for his decision. Rather, he repudiated the logic behind it and blamed those interests who were pushing for the return of the gold standard. This reminds me of a quote by Schumpeter (1918) that Prof. Wilensky (!!) highlighted in his most recent book: "One should really never say, "the state does this or that." It is always important to recognize who or whose interest it is that sets the machine of the state in motion and speaks through it." I recently finished the book and should be posting about it soon.

    @ JH: Thanks for the Keynes references. National Self-sufficiency is excellent!. As for Keynes's focus on enterprise/investment, this is fundamental to his view of economics.

  14. ...and I expect to post something on that too shortly!

  15. It will be a great pleasure to read you on Wilensky!! For some reason, I think he will be directing your reading of him, as he has directed serious readership over the decades. There was no greater mind in the last 50yrs on political economy than HLW's. He was the shelf for every bright politician, banker and economist, sociologist and philosopher, entrepreneur and labour intellectual, system analyst and cognitive scientist.

    To DES I will grant that irony is the appropriate medium for the Eurozone theatre and the UK. History has indeed been neglected. Hope that he comments more often; I presume that it can become problematic.

  16. GC, I think you are right...And I can't think of anyone who knew more about the basis for good policy as he did.

    @DES: Your comments are very much appreciated. In fact, I thought your comment in regard to Joseph's piece on fiscal policy vs monetary policy was really interesting. In that comment, you mentioned that, "although political pragmatism requires the distinction, fiscal is for all intents and purposes, an ancilla of MP". From an operational standpoint, I can see how this is the case, especially in regard to taxation. Would you happen to know any articles that elaborate on this point?

    1. ...for instance, I can see how liquidity is adjusted by taxation, leaving other parameters unaffected. Anyway, descriptions of the interaction between Treasury and CB from an ops standpoint aren't always easy to find.

    2. Consider simply the management of capital flows on smaller economies. It readily endears the hypothesis that monetary policy is a serious imperative in the matter of managing transactions. Fiscal policy can't even be considered.

      As far as reference in the matter, Mishkin is serious; among the counterfactuals,bookmark a recent BIS vocal by JP Danthine. As to your more productivity issue, I would skew your readers towards the very capable Jorgenson.

    3. Thanks for these precisions and references. I found the Danthine speech provides lots good insight into the matter.

  17. Circuit,
    Nice post. Couldn't agree more. You might want to check out something that Wray put together back in the late 1990s on a similar theme:

  18. @ADB & ciruit. An exciting post/comment session, especially the Churchill decisions and deliberations thereto.
    As followup on the ideas, I am having trouble accessing the Wray link as given. Is there another address I can try for the paper?

  19. Thanks Arun. The paper you linked is very good.

    @KP: the link works if you remove the period following the url.