Posts Tagged 'long-term unemployment'

Optimistic Thoughts about Productivity Growth and Secular Stagnation

The world, for all kinds of reasons, seems to be in a rather deplorable state, and the trendlines are not necessarily pointed in the right direction either. I won’t go through the whole, or even a partial, list of what is depressing me these days, but there is one topic that comes up a lot in the economics blogosphere, secular stagnation, about which I can conjure up some reasons for optimism.

What a lot of people are depressed about is the unusually low rate of growth in labor productivity that we have seen in the current recovery from the Little Depression. Although the rate of job creation has picked up over the past 15 months or so, averaging over 200,000 new jobs a month, the minimal increases in labor productivity mean that output growth has been much slower than usually observed in previous recoveries from steep downturns. The slow increase in labor productivity and the corresponding weakness of the recovery have been widely cited as evidence that we have entered into an era of secular stagnation.

I don’t deny that secular stagnation is a reasonable inference to be drawn from the persistently low increases in labor productivity during this recovery, but it does seem to me that a less depressing, though perhaps partial, explanation for low productivity growth may be available. My suggestion is that the 2008-09 downturn was associated with major sectoral shifts that caused an unusually large reallocation of labor from industries like construction and finance to other industries so that an unusually large number of workers have had to find new jobs doing work different from what they were doing previously. In many recessions, laid-off workers are either re-employed at their old jobs or find new jobs doing basically the same work that they had been doing at their old jobs. When workers transfer from one job to another similar job, there is little reason to expect a decline in their productivity after they are re-employed, but when workers are re-employed doing something very different from what they did before, a significant drop in their productivity in their new jobs is likely, though there may instances when, as workers gain new skills and experience in their new jobs, their productivity will rise rapidly.

In addition, the number of long-term unemployed (27 weeks or more) since the 2000-09 downturn has been unusually high. Workers who remain unemployed for an extended period of time tend to suffer an erosion of skills, causing their productivity to drop when they are re-employed even if they are able to find a new job in their old occupation. It seems likely that the percentage of long-term unemployed workers that switch occupations is larger than the percentage of short-term unemployed workers that switch occupations, so the unusually high rate of long-term unemployment has probably had a doubly negative effect on labor productivity.

I would even hazard a guess that the low rate of productivity growth in the 1970s may have also, at least in part, been skills-related, though for somewhat different reasons. The 1970s were a period of rapid growth in the labor force because of an influx of women and baby boomers, which continued throughout the 1980s. The influx of first-time workers into the labor force may have had something to do with slowdown in productivity growth in the 1970s and 1980s compared to the 1950s and 1960s, though the increase in the absolute size of the labor force was also a factor in holding down the rate of productivity growth. When the labor-force participation rate peaked in the 1990s, the rate of productivity growth increased.

I am not a labor economist, but a quick internet search seems to indicate that a strong empirical connection between labor-force composition and productivity growth has not been found. But another factor, the increase in energy prices, also had a skills aspect, the adjustment to increased energy prices having led to the adoption of new technologies and new methods of production that presumably required new skills different from those that workers had previously acquired. And the new technologies adopted in response to a sudden increase in energy prices had to go through a period of implementation and debugging and improvement during which measured productivity likely declined. Technological transformations require many workers to learn new skills and adapt to new technologies. The time spent learning how to do new things in new ways and figuring out how to do them better and more efficiently may have caused the measured productivity of such workers to drop, thereby slowing down the overall rate of productivity growth.

At any rate, if the anomalous decline in productivity in the expansion following the 2008-09 downturn has been caused, even if only in part, by a loss of skills by workers who were induced to change jobs or occupations or who experienced long periods of unemployment, that decline in unlikely to be permanent, so that the rate of productivity growth and the rate of growth in real GDP can be expected to pick up somewhat over time. Stagnation may therefore not be as long-lasting as some people fear.

Maybe that’s not such a great reason for optimism, but for now at least, it’s the best that I can muster.

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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