Productivity in the short run is a residual.

 Ken Houghton retweeted this letter…from the Financial Times; Unused Capacity:

“My brothers and I run a relatively small family business with a turnover of below £20m. We could easily cope with a 20 per cent increase in business with no extra staff, and even a 50 per cent increase might require only a 10 per cent increase in staff. This would mean a huge growth in productivity, and I strongly the suspect the same is true for most smaller and even many larger businesses across the UK.

For most wholesalers and retailers it is much the same. Walk into practically any shop and it’s clear they could cope with more customers with few, if any, additional employees. Even on Oxford Street or in Brent Cross or Westfield, rarely would you have to wait so long for service or to pay that you would walk out. A few restaurants and hairdressers are always full, but the sectors as a whole have huge unused capacity and they represent a very large part of the economy.

The economic models currently in use have failed to explain why wages have not increased as unemployment has fallen so low. These same models are incorrect in their conclusions about productivity growth — indeed these two failures are linked.

My conclusion based on observing actual businesses is that if nominal demand were to continue to grow then both productivity and real wages would start to grow more quickly, and economists and statisticians would again be left scratching their heads wondering why their models were wrong.”

Howard BogodLondon W9, UK