Output is a function of how many hours are being worked and productivity. Ahead of tomorrow’s US employment report, let’s look closer at these two variables.
The average weekly hours worked in the US has been fairly steady in recent years. The average over the past year through March was 34.4 hours, and the three-year average is 34.5 hours. The average over the past 10 years, which includes the Great Financial Crisis, is 34.3 hours.
This is remarkable. In 2000, the French government had controversially imposed a 35 hour work week which was resisted. Rather than through the government, the US has achieved it in a decentralized non-statist way.
In 1930, Keynes wrote a short essay “The Economic Possibilities for our Grandchildren.” He famously predicted that his grandchildren might only have to work three hours a day due to the further application of science (technology) to production. I ask in my new book, Political Economy of Tomorrow, “Aren’t we Keynes’ grandchildren?”
The debate over the labor market and how to increase full-time positions misses a key point. Just like modern businesses do not needs to vast sums of capital that used to be required, the modern economy may simply not generate full-time positions in line with the growth of the prime age (24-54) workers.
The journalist Derek Thompson notes that in 1964, ATT was the largest US company, with a $267 bln (in 2015 dollars) market cap and almost 760k employees. In 2015, Google’s market cap was $370 bln, and it employed 55k workers.
The number of prime-aged people either working or looking for work has been trending lower since 2000. Men’s participated has been falling since the late 1970s. If a gradual and organic (as opposed to being ordered by the state) decline in hours worked is one way that scarcity of work can be distributed. The decline in the participation rate is another. The drawback of letting market mechanisms drive the process is that the results are not always optimal from society’s point of view.
Moreover, reports suggest that although the Fed argues that full employment is at hand, underemployment is a growing problem. Businesses cannot use the full skill set its employees have developed. Research suggests that around 40% of new college graduates have jobs that do not require a college degree.
Growth in output per hour of work has slowed. From 2007 through 2016, productivity rose about 1% per year. From 2000 through 2007 productivity rose by nearly 2.6% a year. In the 1990s, output per hour rose 2.2% annually. The US has created 7.8 mln jobs over the past three years, but growth (GDP) has been mostly disappointing. The US economy grew 1.6% last year, the weakest in five years.
One of the themes of the Political Economy of Tomorrow is that nothing fails like success. Businesses have succeeded in keeping labor costs down. This could be one of the key reasons why productivity growth is poor. Business wants to keep their wage bill down as they want to minimize the cost of inputs and labor is understood as another input.
One of the key drivers of productivity is technology or replacing human effort with machines and smarter machines. A powerful incentive of this is the relative cost of labor and technology. By ensuring cheap labor, businesses have less incentive replace people with machines. Real wage growth in the US has been minimal since 2000, and the real minimum wage is low relative to 50 years ago.
Weak wage growth means that it may be economical to hire people to perform low productivity activity. Employment then expands in such areas and lower the aggregate measures. This depresses capital investment and productivity.
Productivity is not evenly distributed through the economy. Work by two economists at the Brookings Institution (Joseph Parilla and Mark Muro) found that large US cities and the energy belt (oil, gas, and mining) had the strongest productivity gains. While small cities, especially in the south and southwest were laggards. The economists found San Jose, California to be among the most productive urban centers. Productivity rose an average annual rate of 2.7% between 1978 and 2015. San Jose has high employment in R&D and STEM industries. These sectors account for 30% of the employment in San Jose compared with 9% on average in the 100 largest cities.
Parilla and Muro’s work about the geography of American productivity has important implications for Europe. Economic theory suggests that regional productivity will converge. This does not appear to be happening in the US, despite fiscal transfers, ostensibly greater labor mobility, common language, etc.
There is an unspoken idea in Europe that the kind of reforms that the EU and creditor countries are insisting on will lead to convergence between the south and north. There is a good reason to question this assumption. Note too that the poorest region in the US remains the old South, that sought independence in the middle of the 19th century. Greece and Italy will never be like Germany and Austria any more than Mississippi and Arkansas will be like Connecticut and Vermont.
We know how to boost employment and productivity. We recognize that economic growth has proceeded by fewer hours of work needed to produce the same amount of goods and services. We could rationally figure out a way to organize ourselves accordingly. Or we can let market forces distribute the scarcity in its market logic which is taking a toll on family structure and the longevity of middle age men. We can boost productivity by providing incentives, like higher wages, which will encourage the further deployment of modern science and technology, but that could come at the price of the even greater scarcity of meaningful employment opportunities.
We are Keynes’ grandchildren. We can envisage of society that has both more leisure time and greater productivity. The main hurdle is not a foreign country, like China or Mexico. It is not about immigrants vs. “native” workers. A major obstacle arises from the success businesses have enjoyed in keeping labor costs low and the ideological barriers that insist on the link between work in the market economy and consumption.