- Date published:
8:51 am, November 9th, 2009 - 9 comments
Categories: economy, unemployment - Tags: productivity
Like here in New Zealand, unemployment continues to climb in America. And one of the results is soaring productivity.
But wait, isn’t higher productivity good?
In normal circumstances, yes, when it comes about from capital deepening (ie businesses investing in equipment rather than taking profits) or a more educated workforce. But productivity will also raise when unemployment goes up, because unemployment is rising.
The least productive jobs usually disappear first when businesses close and cut back. Overall output falls but the amount of work done falls even more, so productivity (output divided by hours of work) climbs. That’s not a good thing – everyone is worse off.
That will be worth remembering when New Zealand’s productivity stats come out in March, and they show a big leap in productivity. It would be embarassing for anyone to foolishly claim that increase is somehow a result of Key sitting around and smiling for the cameras, when it’s really a result of tens of thousands of Kiwis losing their jobs.
I’ve been led to believe that when productivity goes up, wages follow.
Except when they don’t, because when productivity is going up, wages are purely a function of supply and demand and have nothing to do with productivity any more.
If all things stay the same then if productivity goes up, wages must fall. This is because the market has stayed the same and so the same number of units will be sold but those units can be made with less labour. This is why we keep going for an export led recovery because there happens to be huge markets out there that we can export to – until they can make their own at least.
For this reason the rate of uptake in employment will be a lot slower than the decline. This is because businesses essentially purge themselves of unproductive jobs and will focus on efficient allocation of resources when it comes to rehiring again as the economy improves.
Also add that a lot of unprofitable businesses simply cease to exist. You could argue whether thats good or bad- hopefully the remaining businesses will be more productive just not larger.
This all goes to show what a crock of proverbial the conventional wisdom of economics and associated terms are. Its not a dreary science at all, its more a case of much quoted sacred cows that disguise reality. High priests like Don examining chicken entrails and declaring thereon. What the two faced denizens of Treasury etc wont ever say is what they really mean in human terms, things like lower wages, worse working conditions, who gets the cash etc.