Productivity growth and employment

Productivity growth in the United States has rebounded sharply over the past decade, after the disappointingly sluggish growth in the prior two decades. But stronger productivity growth has coincided with sharply declining manufacturing employment, leading some analysts to suggest that the rise in U.S. productivity growth may have destroyed jobs, as companies need fewer workers to produce the same amount of output.

William Nordhaus investigated the productivity rebound along with the relationship between productivity growth and employment in manufacturing. He looked at detailed industrial productivity and employment data for almost 60 years, with the focus on the U.S. productivity renaissance since 1995.

According to Nordhaus:

About 40 per cent of the rebound in productivity growth has been concentrated in "New Economy" industries.

But there has also been rapid productivity growth in areas such as retailing and wholesaling, financial services – including securities and insurance – and real estate.

The government and construction sectors have seen no productivity growth.

Examining the relevant "elasticities" between employment and productivity growth, he discovered that more rapid productivity growth leads to higher rather than lower employment in manufacturing. This shows up most sharply for the most recent period, since 1998.

For individual companies or industries, higher productivity growth may lead to a loss of jobs, says Nordhaus. But from the perspective of manufacturing as a whole, or of major manufacturing industries, the lower prices that result from higher productivity have increased demand growth and more than offset the employment-lowering effect of higher productivity.

Source: Andrew Balls, Productivity Growth and Employment, NBER Digest, November 2005; based upon: William Nordhaus, The Sources of the Productivity Rebound and the Manufacturing Employment Puzzle, National Bureau of Economic Research, Working Paper No. 11354, May 2005.

For text: http://nber.org/digest/nov05/w11354.html

For abstract: http://papers.nber.org/papers/w11354

For more on Economy: http://www.ncpa.org/iss/eco/

FMF Policy Bulletin/ 13 December 2005