Tag Archives: wages

Revisiting the Productivity Slump

Three years ago, in my book An Extraordinary Time, I advanced the view that governments have little power to make their economies grow faster over the long run. Economic growth, beyond the next year or two, depends mainly on productivity growth. Drawing on the experience of the 1970s, I asserted that governments cannot manage this in any predictable way; there have been periods when productivity improved quickly, usually when no one expected it, but slow productivity gains are the normal state of affairs.

Predictably, this viewpoint was not very popular. On the right, the usual suspects insisted that fewer regulations and lower tax rates, especially on capital, would usher in a new age of higher productivity and faster economic growth. On the left, I heard objections that I was condemning workers to stagnant living standards; if governments would spend more on education or infrastructure or research or something, productivity might skyrocket as it did in the 1930s and the 1950s.

I’ve been reexamining this issue, looking at the evidence that has come in since An Extraordinary Time appeared. Unfortunately, it seems to support my case.

In the United States, the much-touted 2017 tax reform, which mainly reduced taxes on business, seems to be doing nothing for productivity. Last month, in its latest economic outlook, the Congressional Budget Office projected that total factor productivity in the business sector, which takes account of capital investments and improvements in workers’ skills as well as output per worker hour, will grow about 1.1 percent per year over the coming decade, about the same miserable rate as in the 1970s and far more slowly than in the quarter-century between 1982 and 2007. The combination of this performance and slow population growth will leave the U.S. economy will be hard-pressed to grow at 2 percent annually, CBO found. That is far more slowly than U.S. politicians of either party claim is possible.

This is not merely a domestic trend. The OECD, the research organization of rich-country governments, projects that labor productivity in the wealthy economies, on average, will be a minuscule 4% higher in 2020 than it was in 2010. Some countries, mainly in Eastern Europe, are projected to do much better. Others, though, are seeing no productivity growth at all, which will make it difficult to improve workers’ wages. The Conference Board, a business research organization, finds that productivity growth is slowing in the major emerging economies as well, holding down their growth potential.

Is there any be cause for optimism about a productivity revival? Perhaps. An interesting article published last year suggests that slow growth in productivity in U.S. manufacturing may be related to outsourcing; the authors, economists at the Bureau of Labor Statistics, suggested that “industries that shift their production process toward greater use of intermediate purchases may be doing so at the expense of innovation.” We’ve seen some evidence over the past several years — predating President Trump’s attacks on trade — that manufacturers have been shortening their supply chains and bringing a greater share of their production in-house. If the BLS economists are right, this could stimulate innovation and hence faster productivity growth in the manufacturing sector.

Manufacturing, though, now accounts for only a small part of the economy in most wealthy countries. It’s no sure bet that faster productivity growth in manufacturing would provide enough of an economic boost to give workers the higher living standards they expect government to deliver.

Dirty Laundry and High Productivity

Not too long ago, on a visit to Copenhagen, I took several shirts to a laundry. The proprietor greeted me brusquely with the words, “I can’t do express.” He wanted four days to wash and press my shirts, longer than my remaining time in the city.

That evening, on my way to dinner, I walked down the same street and saw the owner still at work, surrounded by piles of clothes. Suddenly, his disinterest in my patronage made sense. Denmark’s economy is strong, unemployment is negligible, and there aren’t many workers willing to accept low-paying, low-productivity jobs in laundries.

I’ve replayed this incident lately as the I’ve heard complaint after complaint about the purported shortage of labor in the U.S. economy. Trucking companies, manufacturers, fast-food restaurants, and retailers all say they can’t hire enough help. The truth, though, is that the supply side of the labor market–prospective employees–responds pretty quickly to economic signals. The reason firms can’t hire enough help is that the compensation they offer is too low. The reason for that, simply enough, is that the way the firms plan to use those workers won’t result in sufficient productivity to justify higher wages.

As an economic matter, it’s good if those low-productivity jobs disappear. On another trip to Denmark, many years ago, a labor union leader told me, “We want to be a wealthy economy, and we can’t be a wealthy economy if we have low-productivity jobs.” It was that union leader’s view that Danish businesses should move low-paying jobs abroad and focus on providing high-wage, high-productivity jobs in Denmark.

You won’t find many union leaders suggesting that in the United States–nor business leaders or politicians. We pay far more attention to the number of jobs in our economy than to the quality of those jobs, and we’re reluctant to let low-productivity jobs vanish. Thus, debate over raising the minimum wage revolves around whether this would cause unemployment among hamburger flippers rather than whether higher labor costs would lead fast-food chains to develop new equipment that would raise productivity. Debate over immigration is colored by the assertion that we need immigrants to come and do low-wage jobs U.S. citizens don’t want, an assertion that allows us to avoid discussing why employers aren’t investing in capital equipment that might render those jobs more attractive and better-paid.

Some companies, of course, see profit in employing low-wage workers and don’t want to change that business model. But if we look deeper, tens of millions of us have selfish reasons for cherishing low-productivity work. While we give lip service to higher productivity, we also want an economy in which it’s cheap and easy to find someone to clean the house, babysit the kids, and mow the lawn. We like going out for an inexpensive dinner and paying a few bucks for an Uber ride across town, treats that would be far less affordable if there were fewer workers who have no better alternatives than taking low-productivity jobs with low pay.

If we want to raise living standards for all Americans, we can’t do it with sluggish productivity growth. That means that we may have to make some sacrifices. That’s how I solved my laundry problem in Copenhagen. I tossed my shirts in the washing machine, let them drip dry, and ironed them myself. Admittedly, my ironing skills were a bit rusty. But if having a high-productivity economy means I’ll need to keep them honed, I suppose I can manage.

Making It Hard to Save

Americans are famously unable to save money. The personal saving rate is a scant 5% of disposable income, and while two in three adults told Federal Reserve researchers last year they were “living comfortably” or “doing okay,” many of those same people apparently have no savings: 46% of respondents to the Fed survey said they did not have the cash to cover an emergency expense costing $400. Among people with household incomes below $40,000, only one in three said they could come up with $400 in cash.

Last month, I got an unexpected taste of why it’s so hard for people to save. My District of Columbia income tax return had an error. Rather than refunding my overpayment by check, the DC finance department sent me a Citibank debit card. I’d never used a prepaid card before, and the experience was educational. Moving the money from the card into my bank account, which is not at Citibank, turned out to be a major ordeal.

In theory, according to Citibank, it’s possible to set up a password on the Internet to transfer money from card to bank account. I followed those instructions, to no avail. The only way to get my money, it seemed, was to go to the bank.

But not to my bank, which wanted a fee to turn Citi’s debit card into cash. To avoid the fee, I had to take the card to a Citibank branch. I did so–to be told that the amount on the card exceeded Citibank’s daily cash withdrawal limit. I took what Citi would give me, cautiously walked the cash down the street to my bank, and deposited it. The following day, I repeated the process. All told, between my attempt to set up an Internet password and my five visits to bank branches, it took two hours of my time to gain access to money that was already mine. Had the two branches not been close together, the transactions would have taken far longer, and I would have had to stroll through Washington carrying uncomfortably large amounts of cash.

This is the situation facing the millions of American workers, mainly in low-wage jobs, who now get their pay on a debit card rather than having it deposited into a bank account. Yes, I understand that paying wages via debit card may be useful to people who don’t have bank accounts, and I imagine debit cards are cheaper for employers or they wouldn’t use them. But as my experience showed, when you receive your pay on a debit card, you may well have a difficult time saving money in the bank. Which could leave you in a tough spot the next time you need $400.