I was listening to an economics lecture from UC Berkeley on Youtube about productivity. It was lecture 23 from Economics 113, spring 2013. The professor was Martha Olney.
In the video she shows a chart of productivity from 1960 to 2012 about the 2:00 minute point. She mentions that productivity grew in the 60's at 2.8%, from the mid 70's to mid 90's 1.5% and from 1995 to 2004 3.3%. Her point is that there was a slowdown in productivity from the mid 70's to the mid 90's, but nobody has been able to figure why.
She showed that it was not caused by age, gender, oil, manufacturing/services, immigration, education, R&D, choice to work less, and more. None of these factors showed any correlation to the the changes in productivity.
I don't understand why this is a mystery. To me the answer seems simple. Let me start out by giving an equation for productivity.
Productivity = Wage rate/unit labor cost
Unit labor cost = labor share * price level
Thus,
Productivity = Wage rate/(labor share * price level)
Productivity = (real wage * price level)/(labor share * price level)
In real terms...
Productivity = real wage/labor share
From this equation, we would expect productivity to rise when real wages rise and when labor share falls.
Here is a graph of this equation from 1947 to 2013. (Business sector: real compensation per hour/Business sector: labor share/100)
Graph #1
We can see a slow down in productivity from the mid 70's to mid 90's. Now here is a graph of just Business sector: real compensation per hour/100)
Graph #2
The changes that she mentioned about productivity are now more obvious to see. So most of the story about how productivity changed over the decades is really the story about how real compensation changed. In other words, to understand the changes in productivity, one really just needs to understand why real compensation per hour changed.
One of the factors of a falling real wage was the minimum wage. Here is a graph of the minimum wage from Financial Ramblings.
Graph #3
We can see that the minimum wage peaked around the time that productivity started to slowdown. And the minimum wage stopped declining in real terms about when the slowdown in productivity ended. Of course, there were other factors, but there was an economic view from the 70's to the 90's that wanted to reduce real wages. This view of wages was in large part due to Milton Friedman's emphatic view during the 1960's that there was no positive objective that could be achieved by a minimum wage.
Well, Friedman was wrong. But his views took hold.
There was a general suppression of real wages in the US, even though productivity was rising. According to the equation above, labor share had to decline faster than real wages were suppressed in order for productivity to rise. It was thought before this time period that labor share was fairly constant. The fact that labor share had to decline to compensate for real wages supports the view that real wages were consciously and purposely suppressed.
Real wages do not perfectly and naturally follow productivity. It would be nice if they did. Real wages can be pushed away from a natural balance with productivity and this is what has happened since the 1970's.
However, the consequences of suppressed real wages and a declining labor share would eventually weaken demand in the economy and make room for bubbles and easy credit. Productivity itself was suppressed from the suppression of real wages, as a declining labor share could not fully compensate the effect.
In a previous post, I talked about the work of Bruce Kaufman who is a wise expert when it comes to the minimum wage. Bruce Kaufman writes that raising the minimum wage to a socially efficient level will actually increase productivity.
"The loss of jobs from a minimum wage (if such occurs) forces society to confront and solve a problem it otherwise prefers to ignore: that is... Why do (some) workers have such low productivity that they cannot earn at least a subsistence wage? Moreover, not only do some workers potentially lose their jobs, some firms also go out of business. But again this result has to be regarded as in the social interest, since it weeds out the least efficient and most backward firms and concentrates capital and managerial talent in the most efficient and advanced firms." - Bruce Kaufman, Institutional Economics of the Minimum Wage: Broadening the Theoretical and Policy Debate, page 447
The suppression of real wages allowed productivity to slow down by allowing inefficient firms to compete with efficient firms. The purposeful effort to lower real wages and labor share created a friction on productivity growth. Thus, on balance productivity slowed down.
She´s Professor Martha Olney
http://emlab.berkeley.edu/~olney/
Posted by: CG | 06/28/2013 at 09:51 AM
Or to put it more simply, if wages are higher, producers will invest more in productive technology.
Posted by: Steve Roth | 06/28/2013 at 11:50 AM
Yes... succinctly put.
Posted by: Edward Lambert | 06/28/2013 at 11:54 AM
Thank you CG.
Posted by: Edward Lambert | 06/28/2013 at 11:55 AM