Growth, productivity and unemployment: what paradox?
Gerard Jackson
Economic growth, rising productivity and a high level of unemployment. Surely growth is supposed to cure unemployment? And as our unemployment level is still high while productivity has risen significantly then productivity must be the culprit, so some claim. (Those who subscribe to this view are unwittingly supporting the proposition that technology causes unemployment. For a rebuttal see The Automation Hysteria by George Terborgh).
Both are wrong. In a free market, even one that is regressing, i.e., consuming capital, there will be no persistent widespread unemployment so long as there are means to employ labour.
Basically only one thing raises productivity and hence real wages and that is continued investment in the material means of production, e.g., a man moves more soil with a bulldozer than with shovel. So what’s the problem? (Although some economists credit technology as the principal means of raising productivity they have overlooked the fact that in order to do this the technology must be embodied in the capital structure, which brings us right back to the material means of production).
When economists argue that economic growth will lower unemployment they really mean that it will lower labour costs relative to the value of labour services. This obviously does not mean lowering real wage rates. But if increases in productivity are offset by increases in labour costs this will keep the unemployment figures high.
Now when an economy comes out of recession there is usually a tendency for productivity to rise as idle and underutilised capital and labour are brought into use. This is a well-know phenomenon that requires no elaboration. In addition, during the recovery period if labour practices that hindered productivity have been eliminated or reduced in effectiveness this could see productivity accelerate.
The reason is that these practices prevented the efficient allocation of capital and use of labor. Only the market can allocate factors to where they have the greatest value, and by preventing the market from carrying out this vital function output and thus living standards are kept lower than they would otherwise be. It is an enormous pity that this in not more widely understood.
Of course, if labour costs in money terms are held relatively steady, even when they are initially fixed above market clearing levels, then increasing productivity will eventually cut into the jobless figures. Another point is under certain circumstances keeping labour costs above market clearing levels can give the impression of rising productivity. This is because these labour costs tend to be borne by marginal workers and marginal firms which are then priced out of the market.
Therefore, freeing labor markets can sometimes appear to lower productivity when all they have done in reality is weigh down the average productivity level while simultaneously releasing withheld capacity and raising payrolls. These facts that are never mentioned in our newspapers.
There is nothing controversial in what I have written here, except, perhaps, to many Keynesians who seem unable or unwilling to connect our unemployment to excessive labour costs. However, rising productivity can continue indefinitely without savings increasing. As I said before, it is investment that basically raises productivity — and investment comes out of savings, domestic and foreign.
If, for example, our savings are negative then net investment could not taking place (I'm ignoring foreign investment for reasons of simplicity) which means we could not accumulate capital. As capital accumulation is really growth, then we would not be growing. This leads to the conclusion that rising GDP in these circumstances would be the product of government spending, increased and consumption and a better utilisation of labour and capital goods. (Regardless of what is taught, spending on housing and government funded circuses like the Olympics is pure consumption.)
If it is otherwise, then continuing capital accumulation would eventually create a labour shortages within a few years. But this brings us back to savings. If there are no savings, including foreign savings, how can we accumulate more capital per head? We can't, is the answer. And irrespective of what some are preaching, growth does not generate savings. This is like saying that farmers can grow wheat without seed corn.
When it was claimed in 2001 that profits were at record levels (journalists made the same claim in 1995) this was said to indicate strong economic growth. They also suggested that these profits were at the expense of labour. If this were true in any meaningful sense then there would have been labour shortages. But were profits at a record level anyway?
One of the things one needs to look at are real rates of return which, I think, averaged 10 per cent in the 1960s. Moreover, the concept of profit shares is not a particularly helpful one given that private trading enterprises include incorporated and unincorporated businesses. Thus if the profits of incorporated enterprises rise while those of unincorporated companies fall a false impression of rising profit shares can be created. This is what happened in 1995. So what needs to be done is examine the profit share of the trading sector as a whole.
Some commentators also claimed that real wages were flat and that our labour costs fell relative to the US labour market. So what? What matters is the cost of Australian labour relative to the value of its product — not any association with American labour costs.
On top of that, labour's so-called share of GDP is always being underestimated by a significant amount. It would be much higher if the gross wage was actually used — the total cost of hiring people, which also includes things like superannuation contributions and payroll taxes. Moreover, that a firm's superannuation payments are factored back into wages rates is scarcely understood here.
Gerard Jackson is Brookes' Economics Editor
BrookesNews.Com
Monday 16 June 2003