You know the full-employment productivity multiplier I’m always going on about?

March 21st, 2017 at 9:56 am

Well, economist Josh Bivens wrote a neat paper about this dynamic, and I interviewed him about the results for my WaPo post today. Check them out.

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7 comments in reply to "You know the full-employment productivity multiplier I’m always going on about?"

  1. Smith says:

    I wrote about this on this blog May 20, 2016, yet for some reason haven’t been interviewed. There is not a small amount of common sense in the idea. Notice how I emphasize the primacy of wages leading the virtuous cycle.

    Here is the comment:

    Here is the most relevant quote:
    “2) Implied and spoken of above, but not stated as clearly, does higher wages give incentive for productivity gains or as many argue, higher wages must only follow productivity gains. I’d guess a bit of both with emphasis on the former, an extremely significant distinction.”

    Likewise, is there any reason one would be surprised that low demand, an economy functioning under capacity, slows investment, or less demand and less investment leads to less R & D, or that less R & D leads to slower productivity growth. If this doesn’t seem intuitive, you need to question your reasoning ability. Study and quantify it, but don’t act like it’s a revelation.

    I might add Yellen’s 2% solution dooms the economy anyway, by slowing it before full employment is reached and only four years in the past 60 in a non recession was inflation at or below 2% and unemployment 5% or less. Remember your own data says full employment is two years away.

    See also:
    WWII income tax rates lasted until 1963 actually, restore them. Why does this blog and other liberal economists ignore what those tax rates meant? Piketty doesn’t
    Don’t agree with many ideas from Cowan, but interesting read.

    Also, this full employment productivity idea is part of delusional win win rising tide Clinton propaganda neo liberal idea that the rich and ruling class don’t have to be fought, although Fight for 15 wins in California and New York are big victories. (Clinton was against the idea)

    • Smith says:

      Is that comment from May 20, 2016 viewable by anyone else, my browser says “awaiting moderation” but I can’t tell if I’m cookied in because I’m the author, or it’s visible because of the link ( in that case a huge bug in the software )?
      I have other references to my argument that rising wages induce productivity gains, but the other ones I found at first were linked to another blog (Krugman’s for example).
      That May 20, 2016 also notes R & D as a causal factor.

      • AngloSaxon says:

        Sorry, but your data doesn’t jive. Productivity is a poorly understand and calculated ‘index’. We don’t know what it really is. We don’t know what RGDP really is. It is all guesses.

        Your guessing. Just admit it.

        • Smith says:

          Says you. I doubt all the economists who write papers on the subject with data would agree with you either. I do lend credence to the theory based on evidence productivity growth in the 1990s was overestimated due weight given computing power. Also factors like bidding of prices for expensive services caused by inequality also inflates GDP and productivity. GDP itself leaves a lot to be desired as a metric for measuring progress. But no, throwing up your hands and saying we don’t know what it really is doesn’t accurately reflect reality, and doesn’t itself seem productive.

      • Smith says:

        Actually, this blog linked in that May 2016 to Bevins with the argument (wages and full employment push productivity) where I commented as noted above. Ok, we all thought the same thing. But see my other comment below about actual papers on the subject going back many years.

        Here is the active link (the other was a duplicate stuck in moderation limbo)

        This wasn’t on OTE’s blog but written at same time:
        2% average inflation target dooms the economy to failure. It’s not secular stagnation, it’s Fed induced stagnation.
        The years when employment was less than 5% and inflation averaged 2% or less? 1998, 1965, 1956. That’s with an average of 2%, not a ceiling of 2%. Also 1998 came on the heals of a historic drop in oil prices.

        The assumption about the relationship between productivity and wages may be reversed. Instead of thinking that greater productivity allows wages to increase, try this on for size. Rising wages beyond productivity growth encourages and pushes increased productivity. Rising wages encourages all manner of change and investment to increase productivity. This is why the conservative mantra of cutting labor costs continues to undercut the economy. It partly explains why high wage Germany remains competitive. This makes sense, but I leave the proof to a nobel prize winning analysis, how about it? Part of this thought follows from the 1995 – 2005 2.98% productivity increase per year, and also aligns with the 3.17% increase for ten years predicted by Gerald Friedman for the hypothetical Sanders program.

  2. Smith says:

    “Higher demand for labor is also associated with an increase in labor productivity and this accounts for about half of the increase ineconomicgrowth under the Sanders program.18 ” (the 18 is the footnote, from report of Jan 2016, which cites papers going back to

    Verdoorn’s law (from 1949) links productivity to growth, a closely related concept, though not exactly the same as low unemployment and higher wages causing higher productivity, because growth itself encourages investment (often in more productive equipment) or new processes to meet need for expanded capacity. The argument that higher wages would by itself induce the same effect (which I think is correct) is different, but makes sense. It’s part of transit workers contracts for example. If you grow up near New York City, when a strike is threatened over level of pay raises, the both sides save face by saying costs are met by productivity increase. Sometimes this really means less workers will be employed, but the idea is still higher wages driving need for productivity. Germany, where it’s very difficult to lay off workers, is possibly a good example of higher wages promoting higher productivity.

    18 There is a strong positive correlation between productivity growth and levels of unemployment and rates of GDP growth; the R2 in a regression for productivity growth and real GDP growth is 0.65. Higher GDP growth explains all of the higher productivity growth projected here. The association of higher productivity growth and low unemployment is sometimes called “Verdoon’s Law” after the Dutch economist, P. J. Verdoorn; see J. Verdoorn, “On the Factors Determining the Growth of Labor Productivity,” Italian Economic Papers2 (1993); P. J. Verdoorn, “Verdoorn’s Law in Retrospect: A Comment,” The Economic Journal90, no. 358 (1980): 382–85, doi:10.2307/2231798. It is also associated with the British economist Nicholas Kaldor; see Nicholas Kaldor, Causes of the Slow Rate of Economic Growth of the United Kingdom: An Inaugural Lecture(London: Cambridge University Press, 1966). For other discussions, see R. Dixon and A. P. Thirlwall, “A Model of Regional Growth-Rate Differences on Kaldorian Lines,” Oxford Economic Papers27, no. 2 (1975): 201–14; Garth L. Mangum, Three Worlds of LaborEconomics(M.E. Sharpe, 1988). An empirical test of U.S. data is in Yongbok Jeon and Matías Vernengo, “Puzzles, Paradoxes, and Regularities: Cyclical and Structural Productivity in the United States (1950–2005),” Review of Radical Political Economics40, no. 3 (September 1, 2008): 237–43, doi:10.1177/0486613408320002. Some theoretical explanation of the phenomenon is in Walter Y. Oi, “Labor as a Quasi-Fixed Factor,” Journal of Political Economy70, no. 6 (1962): 538–55.

  3. Smith says:

    This thread the post above has created (for me) just keeps getting better, as this swipe against NAIRU is the closing remark in the paper (:
    “A thorough discussion of the implications goes beyond the scope of our paper, but we believe that the recognition of the importance of Okun’s and Verdoorn’s laws should reinforce the increasing skepticism about the NAIRU and the very notion of a rigidly fixed supply limit to the economy.”

    Of course I don’t believe everything I read, just the papers I agree with.