ECONOMICS U$A
PRODUCTIVITY
To explain the factors that affect productivity growth and the various ways in which the government has helped or hindered the growth in productivity.
OBJECTIVES:
1. Labor productivity is defined as output per man-hour of employed labor. Factors that are important in determining productivity include education, training, the amount of capital (machinery, factories, etc.) per worker and technological innovation.
2. During the 1970’s productivity growth in the U.S. slowed. A variety of explanations have been offered for this. They include: a decline in R&D, a decline in investment relative to GNP, the relative inexperience of the baby-boom generation, the oil shocks, increased government regulation, and uncertainty due to inflation and the changeability of economic policy.
3. Technological innovation has been a major factor in the growth in productivity in the U.S., but the benefits of innovation do not accrue only to the person or firm that financed the research, but to society as a whole. Therefore, there is a justification for some government support of research and innovation.
4. The government may have retarded productivity growth because of tax and regulation policies. Taxes can hurt productivity growth by distorting economic decisions, by encouraging people to invest their time and money in ways, which reduce their taxes rather than in ways that are good for economic growth.
KEY ECONOMIC CONCEPTS:
productivity, tax distortions, innovation, benefits of innovative activity, investment, technological changes, regulation, supply-side economics, human capital, uncertainty
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Contemporary Issues In 2002, U.S. labor productivity increased by over 4.5%. Some analysts estimated that about half of this increase was attributable to cost cutting by companies in the face of sluggish economic growth. However, the rest was due to a more sustained rise in total factor productivity – or the efficiency of the economy – as a result of high-tech advances and the increased use of the Internet. Why is this increase in total factor productivity so important to the long-term growth in living standards? |
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Decreasing Productivity Throughout the 1950’s and 60’s, productivity soared. But by the 1970’s, something was drastically wrong. Throughout the economy, productivity growth was slowing down. The reasons were not immediately clear, but, in retrospect, several factors stand out. The beginning of the 1970’s brought a new era of concern about the environment. Regulations aimed at cleaning up pollution had an immediate and costly impact on American industry. Government regulations forced industry to spend billions cleaning up the environment and protecting the safety of its workers…and millions of these workers were new to the jobs…baby boomers eager to work, but still young and untrained. Their inexperience led to lower output per hour of work…less productivity. In 1973, war in the Mid-East led to an embargo of oil from the Persian Gulf. Energy prices soared…Productivity growth took a nose-dive. And throughout the 1970’s, an economy reeling from spiraling energy costs saw all its other costs rising too. Inflation seemed to be an incurable cancer eating away at the American economy…creating a climate of economic fear and uncertainty…discouraging the capital investment that might have improved an increasingly dismal productivity performance. Comment and Analysis by Richard Gill Many people fail to understand the true significance of productivity growth because the numbers used to express it…1 or 2% a year…seem very small. But small" numbers involve really huge changes in output per capita and living standards over long periods of time. So productivity growth is important and any decline cause for alarm. No matter what the future, the experience of the 1970’s strongly suggested that productivity growth could no longer be taken for granted. |
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Carter’s Quest for Productivity By 1978, President Jimmy Carter was asking himself, what could the government do to improve productivity. Carter understood the historic relationship between productivity, technology and research and development. American consumers were starting to enjoy the productivity benefits that came from advances in metallurgy, communications and computer sciences…all developed by the Space Program. When Carter became president, he supported NASA’s Space Shuttle Program…he pushed hard for government funding of efforts to develop new energy sources. Despite increasing foreign competition, American investment in research and development was declining as a percentage of GNP. Often businesses are reluctant to invest in research and development because the firm can’t appropriate all of the benefits that it creates, so it tends to under-invest in that form of activity. To encourage industrial innovation, the Carter Administration pooled the resources of two dozen major government departments to find ways to help industries to innovate. Most technology research in the United States is and always has been financed by private industry. What the government tried to do in this case was lend a helping hand by encouraging businesses to innovate…and permitting society to reap the benefits of that innovation. Comment and Analysis by Richard Gill Economists put so much emphasis on new technology because new technology is at the heart of productivity growth. The question is how far the government should go in promoting these factors. There are also several general arguments as to why the government should involve itself heavily in research and development work. The costs of certain projects may be too large for private industry; the pay-offs may be too far in the future. On the other hand, there is also a theory that the best thing the government can do is to provide incentives to private industry. |
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Reagan’s Quest for Productivity. By the 1980’s a new group of economists began to say…"let’s unshackle private enterprise…let’s get the government out of the marketplace…let’s give the people an incentive to produce." These economists were called "supply-siders" and they believe that people don’t work to pay taxes. People work to get what they can after taxes. And when you cut the taxes, you increase their incentives for doing that activity. Reagans proposal was for a 10% cut in the income tax across the board. But mainstream economists remained sharply critical of Reagan’s "supply-side" tax proposal. Most people believed that there was some impact of reducing marginal tax-rates on work effort and savings…but most analyses suggest that that impact was very small. While Democrats in the House of Representatives were determined to block the new President’s tax plan Reagan added some new ideas for his tax package. Congressman Barber Conable added a carrot for business in the form of faster depreciation of capital investment. When the votes were counted, the President had prevailed. Economic experts disagreed about the benefits of this supply side economics despite the apparent increase in productivity. Comment and Analysis by Richard Gill The supply side enthusiasts argued that lower tax rates would lead to much higher productivity, which would lead to a greatly increased GNP, and that this greater GNP would actually result in higher total government tax revenues, even at the lower rates. The less enthusiastic view was that lower tax rates would indeed lead to big budget deficits, that government borrowing would lead to high interest rates and that this would result in lower business investment and growth. Comparing 1981 with the late 1980s, you can say productivity increased. There was growth; total federal tax revenues increased. But there were huge budget deficits and real interest rates showed a substantial rise. If you’re going in for massive tax-cuts to spur productivity growth, it would probably also be at least prudent to do something to keep the government spending side of the equation in check. |