Recall the discussion and pictures from this post. I’ve updated the graph, btw, swapping out total employment for private (leaving out government) since that’s comparable to the coverage in the productivity series.
There’s another reason why productivity may be diverging from employment: mismeasurement of productivity growth of a particular type that would show up as both higher productivity and less employment growth.
Economist Susan Houseman has been writing about this for years, and while I don’t think it explains the whole gap, it likely explains part of it.
The problem has to do with outsourcing. When US firms buy cheaper goods or employ cheaper labor from abroad, that can show up as faster productivity growth, even as it displaces domestic workers. Basically, to measure productivity accurately, you have to net out the costs of goods that go into the process (“intermediate goods”) and the labor it took to produce the good or service.
Globalization, at least the way we currently account for in our national spreadsheets, leads to a) an underestimate of how much imports are contributing to value added, and b) doesn’t deal well with the substitution of foreign for direct labor.
Houseman and Mandel give this example:
“Suppose a US automaker imports one million parts from a Japan-based supplier at $10 per part, for a total import bill of $10 million. Consider two scenarios:
Scenario 1: The US automaker improves its production process in its domestic factories, so it only needs half as many components. The import bill goes down to $5 million.
Scenario 2: The US automaker switches to a China-based supplier that only charges $5 per part. The import bill goes down to $5 million.
Surprisingly, these two scenarios are indistinguishable in the US economic statistics. In both scenarios, the import bill goes down to $5 million. The value-added of the US auto company goes up (sales minus the cost of materials), as does its profitability (sales minus cost of labor and materials) and measured productivity (value-added per worker).
Note that even though value-added per domestic factory worker goes up in the second scenario, the impact on domestic real wages and employment is ambiguous. For example, if value-added per worker is rising because of an improved ability to identify new sourcing opportunities, that same capability could be easily used to replace domestic workers… In other words, a measured productivity gain from increased efficiency in the supply chain doesn’t necessarily improve the real wages or employment of US workers in auto factories.”
Two additional wrinkles here. First, this mis-measurement wouldn’t explain the acceleration of productivity in the above figure unless offshoring to lower-cost platforms was a growing part of our manufacturers’ strategy. But of course, there is increasingly more of precisely this type of offshoring. Second, this wouldn’t affect the productivity trend in the chart if the offshoring were domestic—one domestic industry’s gain would be another’s loss. So this is really a globalization story.
Houseman et al guess that if we were measuring this correctly, we might shave as much as half a point off of annual productivity growth, 1997-2007. If so, this would close the gap you see towards the end of the series above by about a third. So again, not the whole story, but not trivial either.
And this ain’t just the stuff of academic measurement. There are many clear benefits to globalization, but from the perspective of those whose wages and jobs are lost, this is a cost—one to which we are not paying enough attention.