Wednesday, August 23, 2017

Low productivity is evidence of inadequate growth, not the cause of it.

Productivity is output per hour. That's how you figure productivity. You take a number like Real GDP and divide it by the number of hours worked in the year the output was produced. That gives you output per hour.

Then you want to see how much it changes from year to year. So you figure "percent change from previous year" or something similar. We know technology is advancing. We expect the economy to grow. So we assume there will always be some improvement. We assume the percent change in productivity will always be greater than zero.

When economists say productivity has been low, they are simply saying that there hasn't been much improvement.

But productivity is a way to measure the growth of output. That's all it is.

When somebody in a position of power says something, people listen. Somebody like John C. Williams of the San Fransisco Fed. So, when John C. Williams tells us there is "a global productivity slowdown" that is "fundamentally redefining achievable economic growth", we listen. We figure he must know what he's talking about. But either Williams doesn't know what he's talking about, or he dumbed it down way too much.

A slowdown in productivity, he says, is reducing the amount of economic growth we can get.

A slowdown in productivity is lowering growth? No. Productivity is a measure of economic growth. First, you get the economic growth that you get, and second, you evaluate it in terms of productivity. If productivity is down, it is because economic growth is down (unless there were big changes in Total Hours Worked, which would be suspicious). If productivity is up, it is because economic growth is up. (Ditto.)

Set aside the changes in Total Hours Worked, and just look at output per hour worked. That's the true measure of improvement. Productivity.

So how do you increase productivity? Easy: You increase output. When output goes up, output per hour goes up. It's true by definition, since we set aside the changes in hours worked.

John C. Williams asks a different question: How do you increase output? And his answer is the reverse of mine: You increase productivity, he says.

But productivity is measured as output per hour. You cannot make productivity go up unless output goes up. It's true by definition.

When John C. Williams says the slowdown of productivity is reducing economic growth, he has things exactly backwards. Low productivity is evidence of inadequate growth, not the cause of it.

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