Home > Growth > Productivity painfully slow in developed countries

Productivity painfully slow in developed countries

The Economist ‘Free exchange’ had a piece on productivity and how it has been rather stagnant in the rich countries. Since the 1960’s rates have dropped (except for Japan in 1970’s) and economist are suggesting that this has contributed to such low wage increases. Explanations for this problem fall into three categories:

1. Robert Gordon (Northwestern University) suggest that humanity has run out of big ideas. Inventions of the early19th and 20th centuries (electricity, indoor plumbing etc) have had a much greater impact on productivity than those of recent technological advances. However it was software and computing power that was the driver behind the productivity boom of the late 1990’s. Productivity growth has also slowed in developing countries (Mexico and Turkey) which should be able to achieve greater output per worker with using technology.

2. Some have suggested that the problem lies in the way productivity is measured as statistical agencies sometime fail to include things like the massive reduction in the cost of digital media (free in most cases) subtracts from measured GDP – smartphones greatly improve productivity but are not captured by the statisticians. But the loss of productivity is far more than the estimates of the unmeasured gains from information technology. A ball park figure (Chad Syverson – University of Chicago) has the US economy losing $2.7 trillion in lost output since 2004 which equates to about $8,400 per person.

3. A further explanation is that inflexible developed economies are not efficient at moving people out of areas where there is no work to areas of growth. Business start-ups have fallen steadily since the late 1980’s. High growth companies have not expanded to other areas and have also preferred to bank profits rather than taking the option of reinvestment. An issue could be that if it was easier and cheaper to locate in depressed areas employment would rise.

Productivity

Machines or Labour in low paid jobs.

In order to boost productivity companies need more financial support for research and development and a reduction in government regulations – red tape. However low pay does allow companies to employ more people in marginal jobs as in some cases the cost of labour is less than the investment needed to introduce automation – checkouts in supermarkets for instance. But the abundance of cheap labour has led to firms to use that labour in less productive manner which leads to underemployment.

 

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