Productivity in the short run is a residual.
“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
Wage growth has surged the last 3 months. Careful Dan, wages are a inflection point related to cohort size. When cohort size declines like it did between 2001 and 2012, unemployment will have to go lower to create the same type of effect. Notice how wage growth before the DeGaulle crisis permanently elevated inflation for over a decade, unemployment had to fall below 4% to create wage growth of over 3%. My guess it is probably close to 4-4.1% in this cohort size, which is about the same as in 1979. It also shows why people were so grumpy by the 80 election post-first Volcker shock. We have a notably better economy now then then and frankly, it is getting better than the 80’s peak as well(when the DeGaulle aftermath was still be felt).
I think your struggling to understand cohort changes and how it effect productivity. Likewise, the current group of 17-30 millies are the peak of that generation. In 20 years they will be hitting their prime and boosting productivity. 30 years later, we will be in another withdrawal.
No struggle at all..not a macro statement.
Here is the link:
https://www.ft.com/content/6f8d34a4-a92e-11e7-93c5-648314d2c72c
And this was the beginning of that comment which had not been copied:
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“Sir, Statisticians and economists necessarily base their predictions for the future by looking at the recent past. They assume that because recent growth in productivity has been so weak it must remain so and that economies’ capacity to grow has been permanently reduced. They aren’t sure why but it must remain so.
Had you asked the same economists 10 years ago what the effect would be of interest rates at or below 1 per cent throughout the western economies for a decade, coupled with a massive increase in the money supply, they would have said hyperinflation and economic collapse.”
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The Great Recession began in December 2007 and Total Household Debt peaked in the 3rd quarter of 2008. They stimulated the US economy in every way they could imagine and what they got was pitifully slow growth. Total Household Debt was somewhat reduced but now we have exceeded that previous peak.
Unemployment has fallen to historically low levels but wages did not go up. That by itself should be enough for economists to recognize that they have damaged labor.
Then add that the labor participation rate (LPR) has been dramatically reduced. Why haven’t economists asked how it was possible that we reduced our need for domestic labor? Why aren’t they speculating that this LPR might be caused by the same thing that is keeping wages down?
We have had these conditions with an historically low effective fed funds rate and massive amounts of quantitative easing.
It is been almost ten years since the beginning of the Great Recession. If the Great Recession had really ended, the Fed would have eliminated QE and raised the effective fed funds rate back to pre recession levels.
Jim:
The same as the one in the post, the link does not work anymore. Thank you though.
Yes I see now that it fails. Weird.
But anyone can get to that page by a google search on this partial sentence from the post above:
“My brothers and I run a relatively small family business with a turnover of below”
Then choose the link which points to ft.com
What the author is basically describing is the non-linear relation of goods & services costs of production with volume of output. This is more commonly stated as “economy of scale” which is as old as economies of human transactions
It has never been any mystery that measured productivity is low when volumes of output are low (which is the definition of productivity. and nothing new in this regard is described by the author..
All the author has actually described is also well-known — demand is low. or alternatively, given low demand that business’s level of competition especially in small and medium sized business’s is low.
One should therefore be asking why competition is so low: Since of course with low demand more lower productivity business’s would go out of business by consolidating to increase demand per business and thus volumes per business (but with no greater overall volumes) and thus productivity at “normal” levels.
So what’s keeping competition from occurring? Driving prices down to compete just ends up putting the lower productivity business out of business.
My guess is that proprietors (owners of small and medium sized businesses) are taking lower profits (or implied wage/salaries) and supplementing it by using savings or selling assets to stay in business
If they don’t they become part of the unemployed or excess labor supply under low demand conditions when their business fails by competition. They’re basically reducing their standards of living or assets (total wealth) while waiting for demand to increase again.
Larger businesses have the borrowing capacity to invest in more productive methods… automating… which is always the case following recessions and low demand so that post recessions .. increased demand … overall employment peaks are lower than in the past.
This also describes the reason for the manufacturing sector’s decline in employment since the end of WWII, services sector’s growth and excess labor supply filling services employment at lower wage/salary growth rates. (in real dollars)..