Home > Uncategorized > Productivity growth is up, are the robots finally coming?

Productivity growth is up, are the robots finally coming?

from Dean Baker

The Bureau of Labor Statistics (BLS) reported that productivity grew at a 3.0 percent annual rate in the third quarter of 2017. While this report got little attention, it is potentially very good news.

Before going into the good news part, it is worth briefly saying a bit about what productivity is. Productivity measures the value of the goods and services produced in an hour of work. It is the main determinant of living standards. If we want more or better housing or health care, we either have to work more hours to produce it, or we need higher productivity.

Alternatively, we may decide we are content with our material living standards but would like more leisure time. This could take the form of shorter workweeks, parental and family leave, or vacations. However, this would also require more productivity.

We could improve the living standards of much of the population with policies that reverse the upward redistribution of the last four decades. But if we don’t get productivity growth going forward, there is a limit to how far we can go with such policies. Unless people are content with stagnant living standards, we need productivity growth.

This is why the third quarter number is such good news. Contrary to the endless stories in the media about robots taking all the jobs, robots actually have been taking very few jobs in recent years. Productivity growth, which reflects the rate at which robots and other technologies displace workers, has been extremely slow in recent years. In fact, it has averaged less than 1.0 percent annually over the last five years.

By contrast, productivity growth averaged almost 3.0 percent in the years from 1995 to 2005. This was also the average rate of productivity growth in the long boom that followed World War II, from 1947 to 1973. The quick pace of productivity growth allowed for rapid increases in wages and living standards, especially in the years after World War II when strong unions and government policies ensured that workers shared in the gains of growth.

The lackluster productivity growth in the years since 2005 has been one of the reasons that wages have been stagnant. The weak labor market caused by the high unemployment of the Great Recession led to falling wages for most workers, as they had little bargaining power.

This has changed in the last two or three years as unemployment has fallen to levels not seen since the 1990s boom. The tighter labor market has allowed workers, especially those at the middle and bottom of the income distribution, to make up some of the ground lost in the Great Recession, as real wages are now rising by roughly 1.0 percent a year.

This is good news, but to see the strong 2.0-3.0 percent annual wage growth of the late 1990s or the long post-war boom, we need more rapid productivity growth. This is why the third quarter number is such good news.

But we should hold off celebrating for the moment. Productivity data are notoriously erratic. Sometimes we see a big jump in one quarter followed by extraordinary weak or even negative growth in subsequent quarters, so we will need more data before we can be confident that this is the start of a new trend with higher growth.

But there are some reasons for thinking that we may be at a turning point. When labor markets start to tighten and wages rise, some low productivity jobs disappear just because they are no longer profitable for businesses.

Think of a greeter at Walmart or a clerk working the midnight shift at a convenience store. It may be worth hiring these people at the federal minimum wage of $7.25 an hour. But if a tight labor market pushes up wages to $14 an hour, these low paying, low productivity jobs may go unfilled. If we have fewer low productivity jobs, average productivity rises.

Higher pay also gives employers more incentive to invest in technology in order to reduce their need for workers. And we have seen an uptick in equipment investment over the last year, which is consistent with businesses trying to economize on labor.

We’ll want to see at least two more quarters of solid productivity growth to support the case that we have turned the corner, but the most recent data is definitely good news that deserved some attention. Among other things, it could mean that we already have the faster growth promised by Donald Trump with his tax cut, without even having to do the tax cut. That might be bad news to the one percent who stood to get the bulk of the gains, but it is very good news for the rest of us.

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  1. Risk Analyst
    November 10, 2017 at 1:09 am

    I agree with you that these numbers are always suspect. The 3% looks good but the aggregate manufacturing sector productivity actually fell, so that increase is some ambiguous non-farm corporate results. We don’t really know right now because the industry details are one quarter lagged, but a deciding factor in second quarter productivity was the big increase in the “Arts, entertainment, recreation, accommodation, and food services” sector. I can’t imagine what a big increase in “entertainment” productivity even means.

  2. Garrett Connelly
    November 10, 2017 at 2:06 pm

    “Unless people are content with stagnant living standards, we need productivity growth.”

    I suggest that when three people own as much wealth as the bottom 50% of us citizens, there is an obviously much faster path to alleviating stagnant living standards than destroying the planet with increasing production.

    Additionally, present day fixation on robots as replacement for humans has the obvious shortcoming of ignoring the simple fact that robots have not yet evolved to what ever is better than sexual reproduction.

  3. Grayce
    November 10, 2017 at 3:02 pm

    Let’s talk about this: “Productivity measures the value of the goods and services produced in an hour of work. ” It is easy to overlook how the value is next divided up, and who gets it any surplus. You allude to upward redistribution over the years. True enough that in finance, extra money is considered part of profit and goes into investor value or more likely executive compensation. Not surprising is that rising productivity bare numbers coincide with CEO salary ratios going from 40x the average worker to 400x and more. So, the question is, “How does the maker of productivity capture any of the gain?” As if leisure would accrue to the one who works smarter rather than harder. Sorry, only on the theoretician’s chalkboard.

    Let’s talk about this, too: “. . .incentive to invest in technology in order to reduce their need for workers.” This could be a non sequitur in the making. Downsizing may be good or it may be following a fad. In today’s slam-dunk management by a three year gig before moving on, whatever makes a bottom line for a year or two is acclaimed as if it were a permanent trend. Margaret Thatcher sold off utilities and thought she had improved the British economy. Young people cash in the family farmland and credit their wealth to their own labor. Corporate tax cuts were intended to be the enabler of investments in technology. If that created new income streams that raised aggregate taxes, then the economy would gain. But, really, the tax cuts find their way into compensation for decision-makers who appear to be clever when the bottom line appears to grow.

    On a lighter note, “entertainment productivity” was once spoofed as the work of an efficiency expert on a symphony orchestra. He asked, “why do we need more than one violin playing the same notes–cut it to one.” He systematically went through for redundancy of instruments and even different instruments that seemed to be playing the same tune. When asked about the quality of the final performance, he rationalized, “Maybe it isn’t exactly the same as you once had, but we cut out the fat and met our business objectives for this year. Our investors should be pleased.”

  4. November 10, 2017 at 5:45 pm

    “Productivity measures the value of the goods and services produced in an hour of work.”

    I once failed an economic exam for thinking that, not realising it meant rate of return on investment.

  5. November 11, 2017 at 1:32 am

    Get rid of most cashiers. Introduce self-checking out. Productivity per man-hour soars even if sales don’t change. We have no idea what is actually happening.

  6. Rhonda Kovac
    November 11, 2017 at 4:55 am

    Point 1: Continued growth is a dead-end and is not to be celebrated — it ravages the planet, and accelerates climate disaster, which has already begun. The entire ‘growth’ mentality has got to be discarded if we are to survive. Baker, though in many ways enlightened, has yet to let that go.

    Point 2: Baker’s belief that robotization (automation) will have a net long term effect of producing MORE jobs could hardly be more idiotic. Robotization, like other technologies, only advances, it never retreats. Whatever the numbers are now, they definitely will not stay that way.

    Human jobs have a spectrum of skill requirements. With technological advances, that spectrum will only be progressively eaten away by machines — including what is now felt to be the exclusive domain of humans: cognition. AI is already chipping away at that, and inroads will only accelerate over time. Plus the motor task capability of machines is already extremely sophisticated.

    Robots have inherent qualities that make them preferable to humans for labor. There are many reasons for this, none of which is going to go away. Humans require more costly maintenance, have limited reliability, need to take time off, need to profit from their labor. And they argue with their supervisors.

    The notion that there is a kind of ‘equal and opposite reaction’ — that for every job taken away, new ones automatically sprout up through the miracle of market regulation — is equally idiotic here. Any new job to compensate for a lost one has skill requirements, like any other job. And as the proportion of such requirements met by robot workers increases, and, correspondingly, the proportion of jobs humans can do better than robots shrinks, the ‘equal’ reaction suddenly becomes not so equal any more.

  7. November 13, 2017 at 12:42 pm

    Today humans are on a path to human eradication from its own culture. So, warnings like those from Garrett, Rhonda, etc. go unheeded. Poverty and inequality (economic and others) is rampant, when it could easily be fixed. Humans are blind to the dangers their own technologies and dogmas create for their continued existence. Humans are a gifted species. But our gifts if not regulated and channeled are also our curse. Humans will not survive if they continue to deny the need for such control.

    What’s involved with such control, such regulation. Much of what we think we know, isn’t so. And much of what supposedly controls our lives, does not do so. On this blog and just about anyplace else we look, we heard and read that we live in the age of neoliberalism. But it’s not so. In 1982, Charles Peters, the longtime editor of “The Washington Monthly,” published an essay called “A Neo-Liberal’s Manifesto.” None of the things we think of as neoliberal are mentioned in Peters’ essay. And its heroes aren’t Margaret Thatcher or Ronald Reagan. Though many call them such today. Peters’ neoliberals are liberals (in the U.S. sense of the word) who have dropped their prejudices in favor of unions and big government and against markets and the military – giving up what they believed was certain. Those who call themselves neoliberals today idealize financialization and globalization, along with deregulation, privatization, financial liberalization, and individual enterprise. Policy discussions and decision are, on the other hand organized around norms and principles grounded in homo economicus, not neoliberalism. The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions. If we can unravel the ideology behind the economics of neoliberalism, then we can develop the imagination to create a capitalism that works for everyone in the 21st century. In this sense neoliberalism has a lot to offer. There is nothing wrong with markets, private entrepreneurship, or incentives—when deployed appropriately. Neoliberalism and all the code words that follow it, efficiency, incentives, property rights, sound money, fiscal prudence, etc. are merely words. Open ended words in terms of policy and institutional arrangements. They presume a capitalist economy—one in which investment decisions are made by private individuals and firms—but not much beyond that. They admit—indeed they require—a surprising variety of institutional arrangements. The fault, to borrow from Shakespeare is not in our stars but in ourselves. We too often and too quickly associate each abstract term of neoliberalism—incentives, property rights, sound money—with only one institutional counterpart. And therein lies the central conceit, and the fatal flaw, of neoliberalism: the belief that first-order economic principles map onto a unique set of policies and cultural arrangement, approximated by a Thatcher–Reagan-style agenda. Unfortunately, economists are the central character in this charade. The correct answer to any question in economics is: it depends. Problem being few economists accept this answer. For example, economists who let their enthusiasm for and support of free markets run wild are destroying the science of their discipline. There are today and historically many forms of markets. An economic science must seek to understand each of these. Economics is imploding and seems inclined to take the rest of us with it.

    The implications of these changes are clear. Markets are acceptable economic tools so long as they advance the welfare of each of the participants, including the nations involved and the general welfare of the world. Tax changes and incentives for corporations, entrepreneurs, financial traders, etc. should be provided only to those who can show their activities are beneficial for all the nation and are not focused on meeting the needs of economic elites. Regulation of economic activities and actors must be tight and fair to ensure these standards are met. And penalties for infractions must be swift and severe. This is how you make a successful economy. Successful for all involved. But this won’t make any economy successful until we solve the problem of economic growth. After the invention of the economy in the early part of the 20th century American politicians wanted a number that would correct the impression of many that industrialization was doing as much harm as good by widening inequality and increasing poverty. Thus, was born first GNP, and later GDP. Though the time of its relevance and necessity has long passed, American politicians, businesses, and economists still pursue it. With predictably harmful consequences.

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