Jobs and productivity growth

In order for there to be job growth, the rate of growth in Gross Domestic Product (GDP) has to be higher than productivity growth. That is because productivity grows when we are able to produce more goods with the same or fewer workers; thus to create jobs, the economy would have to expand faster than the ability to increase productivity. Currently, that means the economy would have to expand faster than 3 percent per year:

Productivity in the third quarter of 2003 rose at an 8.1 percent annual rate, and for the second quarter was revised upward to 7 percent.

Since 2000, the peak year in the last expansion, productivity growth has averaged 4.3 percent.

By contrast, in the 1980s, productivity grew at a 1.4 percent average rate and in the 1990s at a 1.4 percent average rate.

Rising productivity generally leads to price declines, rising real wages and real wealth creation, but it does not create new jobs.

There is a Productivity Revolution under way, yet the boom seems to have caught many economists and policy-makers by surprise, says Graham Tanaka, president of Tanaka Capital Management. Much of this is due to the spread and exploitation of computer and network technologies. U.S. statisticians are now counting 0.3 percent per year of higher real output and productivity growth from rapidly improving computer performance.

As the government measures more of the currently uncounted annual quality improvements already being delivered – from better Internet-enabled services and wireless communications to more effective pharmaceuticals and military hardware – productivity figures may grow by an additional 2 percent per year in coming years.

Source: Graham Tanaka, Want More Jobs? Look to Growth not Productivity, Investor's Business Daily, November 24, 2003.

For more on Productivity and Economic Growth

FMF Policy Bulletin\2 December 2003