The Productivity Problem

Productivity growth is apparently trending downward around the globe. The problem is addressed in Focus Economics, Why is Productivity Growth So Low: 23 Economic Experts Weigh In. The author, whose name I can’t find, begins by explaining the problem as economists see it.

Productivity is considered by some to be the most important area of economics and yet one of the least understood. Its simplest definition is output per hour worked, however, productivity in the real world is not that simple. Productivity is a major factor in an economy’s ability to grow and therefore is the greatest determinant of the standard of living for a given person or group of people. It is the reason why a worker today makes much more than a century ago, because each hour of work produces more output of goods and services.

It’s certainly true that the concept is important. The simple definition gives us the rough idea but the details are very difficult indeed. The text gives us the example of productivity at a branch bank.

Bill Conerly put it well in an article for Forbes: “Take banking, for example. Your checking account is clear as mud. The bank provides to you the service of processing checks, for which you don’t pay (aside from exorbitant fees for bounced checks and stop-payments). However, the bank does not pay you a market rate of interest on the money you keep in your checking account. It’s a trade: free services in exchange for free account balances. Government statisticians estimate the dollar value of the trade, so that the productivity of bankers can be assessed, but the figures are not very precise.

At least in that example, we can see how productivity improvement at a bank might improve your standard of living, perhaps indirectly by enabling the bank to pay a bit more interest on your checking account. Here are three different kinds of examples, in which we can see how improvements in reported productivity result in worse outcomes for us.

Productivity is defined as the ratio of output to hours worked. Output is measured by receipts to the producer. Hours worked are collected by the Census Bureau.

1. A pharmaceutical company raises the price of its generic drugs with no change in its costs. Its receipts go up while hours worked remain the same. Under the definition, productivity goes up.

2. A high frequency trading company inserts itself into an increasing number of purchases of securities on stock exchanges. The purchaser pays a higher price. The HFT company has higher revenue but hours worked remain the same. Again, by this definition, productivity goes up.

3. Two dominant corporations in the same industry merge. The new company fires a lot of people. Hours worked go down. Prices remain the same in the short run, and rise as the new entity exercises oligopoly power. With hours down and receipts up, productivity rises by definition.

Are these examples realistic? In the medicine example, this article lays out the issues. For those interested, this chart shows the value of pharmaceuticals and medicines shipped by manufacturers beginning in 2000. It shows that there was a steady rise, with a sudden jump in 2013. This chart shows that per capita expenditure on pharmaceuticals and other medical products has nearly doubled since 2000.

It’s likely that there are several causes for this, not least the startling prices sought for new drugs. Government productivity figures do not take into account any improvement in the results that new drugs bring, although quality adjustments are made in calculating inflation figures. Given the increased pressure from insurers and doctors to switch to generics, and increased focus on drug prices as a problem, it’s reasonable to see this data and various reports as support for my drugs example. But it’s hard to put a dollar value on it.

On the second example, here’s an article from CFA Magazine written in 2011, detailing the costs of high frequency trading. More recent reports say that the problems are going away, and who knows because it’s hidden behind a wall of words mostly from the people who run the systems and their friends at the exchanges, and the captured SEC. Here’s a review of the literature (behind a paywall), which concludes with this: “This suggests that the identified economic benefits of HFTs (market making, venue competition, more trading opportunities) outweigh their economic costs (large-order predation and run games).” For my purposes, it’s clear that the older article tells us that initially, at least, HFT operated as my example suggests, raising productivity without doing anything useful.

As to the third example, the impact of private equity on employment is everywhere, and the concentration of economic power in oligopoly control of most industries is obvious. Dave Dayen has been writing about it for some time; here’s a recent example. Oligopolistic control also reduces paychecks for the remaining workers.

In these examples, and I could produce many more, productivity as defined by economists goes up but individual consumers are worse off. That is maddening. Once upon a time, we might have thought we could just ignore this kind of thing as an insignificant part of GNP, but that’s not true today, either in the US or globally. The economy, measured by output, is growing, but it is the opposite of the notion of productivity as good for society: it makes people’s lives worse. Except, of course, for a few rich people.

My three examples are exercises of market power. Here’s a long but worthwhile discussion of the harm it does and its increasing presence in the economy. Market power is not the same as rent-seeking, which is usually defined as an effort to get the government to give special treatment to one of a number of competitors. Both are damaging and both inflate productivity figures.

My examples show that reported productivity growth is most likely higher than the kind of productivity growth that the author discusses, the kind that increases the amount of goods and services available in the economy. It’s not unusual for an economics writer to assume only good people operate in the capitalist economy, and ignore the crooks and the cheats. Suppose the author is right that rising productivity that makes for a better life. If real productivity growth is even lower than the low reported productivity growth, his logic explains why life is getting worse for most of us.

15 replies
  1. Godfree Roberts says:

    Life–and productivity–are getting better for the Chinese. Real wages have doubled every ten years for decades and are on track to do so again by 2020.
    That’s partly because the government takes productivity support as one of its core responsibilities. The current ‘Made in China’ program includes a massive element of productivity enhancers, from customs clearance and logistics to tight coordination of specifications and usability between component-makers and final assemblers. And it’s all laid out in spreadsheets with target percentage improvements each year for the next 5.

    • MaDarby says:

      In China as in all other places where capitalism is the economic system wealth is concentrated in a very few hands.   This ALWAYS happens in a capitalist system it is the ONLY thing capitalism is capable of doing. China is in the process of creating its own oligarchy with all the usual privileges of economic power and low or no taxes.  Jack Ma can’t compete with Jeff Bezos and pay a proper tax when Bezos pays none.  Additionally all those wonderful jobs accomplish only one thing – more profits market control and dominating social power of the oligarchs from whom they toil. (OK that’s more than one.)

      Thinking longer term about China – what is to stop China from doing just what the US did?  After WWII there was a fairly long period of general prosperity in the West and it was used successfully to show how great capitalism was compared to the Soviet system (which was not communism or even socialism).  When it became apparent it was no longer necessary to put up this front prosperity began do be taken away and given to the oligarchy.

      What indication is there that should the US no longer be such a competitor with China they won’t do the same?

      Good jobs with good salaries are wonderful unless all they do is enrich a tiny minority – in the industry where I worked, banking, the rule was that each loan officer had to generate fees and income to the bank of five times the salary and benefits paid.  Some formula like that is used throughout a capitalist system.  You work for the oligarchy or you don’t work.

  2. earlofhuntingdon says:

    In search of justifying higher profits for their patrons, economists seem to have lost the distinction between value and price.  (Or is that, like truth, reserved for artists and philosophers?)

    Price gouging is not increased productivity, except in the imagination of economists and the plethora of MBAs who think up schemes to commit it (and expect bonuses for doing so).  The anaphylactic shock it generates could be treated by an epipen, if one didn’t have to sell the home to buy one.

  3. MaDarby says:

    I really appreciate these postings from Ed Walker.  Clarity regarding economics is very hard to come by.

    My view is that economics is little more than a mythology created and developed to justify dynastic wealth and the capitalist system (which is little more than feudalism in a fancy dress).  Its underlying assumptions and principals are built on an ideological world view which glorifies dynastic wealth (see royalty) on what are – if examined carefully – religious grounds.

    The rise of capitalism and extreme protestant ideology are deeply entwined as the historical record clearly shows.

    This year being the 500th anniversary of the protestant reformation is auspicious given the near total control of (German) Calvinist ideology throughout the West.  But that is the subject for another day.

    The numbers measures and charts used by economists do not reflect rigorous intellectual efforts to understand and manage human activity they are little more than Numerology and an effort to introduce unnecessary complexity to justify its baseless authority and keep the public mystified.  Economists are priests in a religion which has endured for centuries and served the interests of power as religion always has.

  4. lefty665 says:

    The suppression of inflation rate measurements/reporting also adds to the illusion of productivity growth. In addition to the examples you cite, if growth is discounted by a more realistic inflation measurement we have had very little real growth in the last decade.  John Williams is a good source for those numbers and other analysis:    As usual, thanks for your postings.

  5. jonf says:

    This is a bit of a mystery. Being an old guy, all I can do is compare prices today to what they were in Mamas day as I recall  today. So if the price to buy it is less than inflation, productivity has improved.

    1961 Ford Fairland 500     $3000   Today  with inflation $24500

    1968 milk quart                          .25  today with inflation  $1.79

    1955 Gas per gallon                   .3     Today  with inflation  $2.74

    1955 medium size hours   $7000   Today with inflation $58245

    The inflated numbers are from the BLS inflation calculator. You can figure if there has been an improvement in the standard of living. I know that house in the country is no where near worth $58k ( but who knows about a major city) and gas around here is now $2.29.  The car is probably around that price today or less . I had to look up milk today at CVS and it was 1.99 per half gallon or 1.00 per quart.  Dairy farmers are doing good.  So if I look at this it appears things have improved assuming I kept up with inflation.

    There are basket prices you can compare out there too. That would be the only way to tell. But once you add in inflation you have to hope you kept up. Now about that $7.25 min wage….

    • Jonf says:

      Minimum wage and inflation:

      In 1961 min was 1.16  with inflation 9.49

      1963                      1.25                           10.02

      1967                      1.4                             10.37

  6. lefty665 says:

    “productivity as defined by economists goes up but individual consumers are worse off” Exactly, and the disconnect between increased worker productivity and wages has been dramatic. Not all individual consumers are worse off, a few are much better off. The issue is the distribution of the wealth generated by increases in productivity.

    In the US, real wage gains since the late ’70’s have gone overwhelmingly to the top 10%, and most of that to the top 1%. Real wages for the other 80%-90% have not increased materially since ’78. Productivity increases, even if not measured very well, have not translated into increased real wages for the non-rich over the last four decades.

    So yes, increased productivity enables increased wages. However, productivity gains do not guarantee real increases in wages for workers. As Ed posits, actual productivity gains that are lower than reported will constrain wage increases. But, that is not the only factor at work. Labor’s loss of leverage to retain some of the gains from productivity increases is perhaps a larger factor. That has been the elephant in the room, at least in the US, for coming up on 40 years.

    Eventually as generations of people give up on “getting ahead” or having prospects for life being better for their children and grandchildren while the rich get richer their despair can cause political instability. Good thing we haven’t seen any of that yet {snark}.

    • John Casper says:


      I’m shocked and in a good way. “Labor’s loss of leverage to retain some of the gains from productivity increases is perhaps a larger factor.”

      Reagan didn’t always walk the walk, but he understood that without collective bargaining, all the money ends up with the elites.

      “These are the values inspiring those brave workers in Poland, the values that have inspired other dissidents under communist domination, who have been willing to go into the gulag and suffer the torture of imprisonment, because of their dissidence. They remind us that where free unions and collective bargaining are forbidden, freedom is lost… They remind us that freedom is never more than one generation away from extinction. You and I must protect and preserve freedom here, or it will not be passed on to our children and it will disappear everywhere in the world.  Today, the workers in Poland are showing a new generation how high is the price of freedom, but also how much, it is worth that price. I want more than anything I’ve ever wanted, to have an administration that will through its actions, at home and in the international arena, let millions of people know, that Miss Liberty, still lifts her lamp beside the golden door.”

      Physicians, attorneys, engineers, …. anyone who uses credentialing to restrict the supply of their labor is bargaining collectively.

      Marginal increases in productivity across all supply chains drive wealth creation.

      “It is the great multiplication of the productions of all the different arts, in consequence of the divans of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.” (Wealth of Nations 22)

      Disruptive technologies are almost always the result of government’s patient R&D investment, like all the technologies in Steve Jobs iPhone. Eisenhower’s vision built the interstates, which led to suburbia, and increased wealth for automakers. Lincoln’s Homestead Act and Pacific Railroad Act (1862) opened up the west and ravaged Native American tribes. No one had the resources to build a transcontinental railroad. It opened up coal and other mining operations which led to the industrial boom.

  7. earlofhuntingdon says:

    Economists’ emphasis on endlessly increasing the pie (in a limited world, sisyphean task) distracts from how we cut it and who eats it.  Or is that the point?

    Measured by gains in revenue and profits allotted to employers, since 1980, we have been more productive.  Measured by quality of life, we have lost.  The gains have gone to a narrowing circle of wealthy people and their corporate and institutional vehicles.

    So are we really being more “productive” or have we allowed more of our lives to be converted to profit for no return in the same way that bidnesses extract grazing, oil, minerals and timber from public lands for a peppercorn?

    When do one firm’s or one industry’s, indeed an economy’s gains in “productivity” become a social harm?  One that should be stopped or limited rather than allowed to grow, in the manner of excising a cancer?  That’s a question that used to be asked frequently by newspapers, writers, academics, social leaders, politicians, presidents, and anti-trust lawyers.  Neoliberal culture has worked unceasingly to banish the question from polite society.  Politicians today ask it as frequently as they volunteer that they are atheists, by God.  Perhaps those are questions about which we should demand better answers.

    • Ed Walker says:

      So are we really being more “productive” or have we allowed more of our lives to be converted to profit for no return in the same way that bidnesses extract grazing, oil, minerals and timber from public lands for a peppercorn?

      I’ve been saying for years that our forebears fought and died for the 40 hour week, and this generation pissed it away for nothing.

      • earlofhuntingdon says:

        Amen.  Although a good bit of it was stolen by neoliberals, too much of it fell away without sufficient comment from those who lost it.  The price of not finding common ground, of being subject to unconstrained propaganda, of continuing employer brutality, and of relying on a political party that redefined itself as the party of Wall Street in much the way Blair turned Labor into the Tony Party.

  8. lefty665 says:

    Census Bureau reported median family income (MFI): 1978 $ 15,060  2014 $51,939  Calculated inflated adjusted MFI 2014 $56,937  Change $-4,998  = -9.6%

    Calculated using the BLS inflation calculator that materially understates inflation.

  9. jonf says:

    The Economic Policy Institute has a great deal of information on this topic. Here is a short version:

    This will lead to many other analyses.  In summary, the compensation gap has been increasing since the 1970s. Between 1973 and 2015 productivity increased by 73% while workers compensation increased by 11%. The analyses at EPI are taken from BEA and BLS.

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