Dean Baker
Truthout, May 6, 2019

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For the last decade, we have been bombarded with stories about how robots were going to take all of our jobs. This claim made little sense since productivity growth, which measures the rate at which technology is displacing labor, was extraordinarily low through this period.

It averaged just 1.3 percent a year from 2005 to 2018. That compares to productivity growth rates of 3 percent in the long Golden Age from 1947 to 1973, and again from 1995 to 2005. If the robots were taking all the jobs, they were doing a good job of hiding the evidence from the Bureau of Labor Statistics, which compiles the data.

But the new data on first quarter productivity released last week tells a different story. Productivity growth rose at a 3.6 percent annual rate in the first quarter and has risen 2.4 percent since the first quarter of 2018. That’s a big change.

Before making too much of this jump in productivity, some caution is in order. Productivity data are notoriously erratic. The data are subject to large revisions, and even post revisions we often see sharp reversals quarter to quarter that are not plausible as actual changes in the economy.

For example, productivity reportedly rose at a 3.7 percent annual rate in the third quarter of 2014, and then dropped at a 2.2 percent rate the next quarter. This spurt in productivity, followed by an actual decline, almost certainly did not really happen. These were just quirks in measurement. There is at least a 50 percent probability that the uptick in productivity we see in the data now will be reversed either by revisions, or by sharply lower growth in future quarters.

But for the moment, let’s assume it is real. One of the main rationales for the Trump tax cut was that it was supposed to lead to a more rapid pace of productivity growth, which would mean higher wages and thereby benefit most of the population. Needless to say, Trump and his crew will surely be taking credit for this jump in productivity, as soon as someone tells them about it.

The problem with the tax cut story is that we are missing an intermediate step. The tax cut was supposed to increase productivity by producing a boom in investment. There actually has been no notable uptick in investment since the tax cut.

Investment in the first quarter of 2019 was up just 4.8 percent from its year-ago level. That’s a very modest uptick, which is pretty much standard growth for the economy during a non-recession period. It would take investment growth on the order of 30 percent to see the sort of uptick in productivity shown in the first quarter data.

There is an alternative story which many progressive economists have long pushed. In a period of low unemployment, employers have more incentive to find ways to use their workers better. If it is difficult to find a new worker, then employers have a good reason to figure out ways to get more out of their existing workforce. This means higher productivity.

Also, in a strong labor market, the lowest-paying and least productive jobs go unfilled. For example, a convenience store might be closed from 1 am to 6 am just because it isn’t profitable to have someone work those hours. Eliminating the least productive jobs raises the average level of productivity.

The jump in productivity in the first quarter data is consistent with this tight labor market story of productivity growth. If this really proves to be true, it would be very good news.

First, a more rapid sustained rate of productivity growth would mean that workers could get faster rates of wage increases without leading to inflation. Of course, workers could also get faster wage increases at the expense of profit margins, which soared in the Great Recession, but there is even more room for wage growth with a 2.4 percent rate of productivity growth.

The gains from faster productivity growth can also be taken in shorter work hours. We can follow other wealthy countries in having paid sick days and family leave as well as four to six weeks a year of paid vacation.

Also, faster productivity growth will make it easier to finance a Green New Deal to address global warming. If we maintain a growth rate that is a full percentage point more rapid than the previous pace, it would add more than $2 trillion to annual GDP by 2029. Much of the economy’s additional production can be devoted to clean energy and conservation, allowing for more rapid reductions in greenhouse gas emissions.

There will be lots of benefits to the economy and society if the upturn in productivity growth reported for the first quarter turns out to be lasting. Unfortunately, it is most likely just a blip.