May 24, 2015
It is remarkable how many people seem unfamiliar with the idea of productivity growth. It’s a fairly simple concept. It means that workers can produce more output in each hour of work. The world economy has been seeing consistent productivity growth for more than two hundred years. That is why we have seen rising living standards. We live longer and better than our ancestors.
When we hear people running around saying that the robots will take all the jobs, that is a story of productivity growth. The argument is that each worker would be able to produce much more in a day’s work because she is working alongside super-productive robots. If these folks had heard of productivity growth then they would know the key question is the rate of productivity growth and whether there is any reason to believe that it will be faster in the future than what we have seen in the past, and furthermore even if faster, whether it will be so much faster as to lead to mass unemployment.
The answer is certainly “no.” Productivity growth has been slow in recent years and would have to accelerate enormously to reach the 3.0 percent pace of the Golden Age from 1947-73. And, that was a period of low unemployment and rising wages. There is a story of high unemployment and stagnant wages, but that is a story of bad Fed policy, bad currency policy, and bad fiscal policy. It is not the robots’ fault.
Yesterday the Post gave us the opposite picture in a piece from Max Fisher which warned of China’s demographic crisis because it faces slowing and then declining population growth. The argument is that it won’t have enough workers to take care of its aging population. This one is really bizarre since China has been experiencing rapid productivity and rapid wage growth, which means that even if fewer workers are supporting each retiree, both workers and retirees can still enjoy sharply rising living standards.
This can be easily seen with some simple arithmetic. Suppose they go from having five workers to each retiree to just two over a twenty year period. This is a far sharper decline than China will actually see. Now suppose their rate of productivity and real wage growth is 5.0 percent annually, much slower than they actually have seen. And, assume that a retiree needs 80 percent of the income of an average worker.
In the first year, a worker would have to pay a bit less than 14 percent of their wages in taxes to support the retired population. If we base their before their tax wage as 100, this leaves them with an after-tax wage of 86. By year twenty the tax rate would need to be almost 29 percent in order for two workers to provide an income that is equal to 80 percent of the workers’ after-tax income. Sound scary, right?
Well, the wage in year 20 will be 165 percent higher than it was in year one. This means that the after-tax wage will be almost 190 on our index, or more than twice what it had been twenty years earlier. And our retiree will also have more than twice as much income as they had twenty years earlier. Where’s the crisis?
Furthermore, this is a low point. Once we reach our ratio of two workers per retiree there is little change going forward. The country does not keep getting older, or at least it does so at a very slow pace. But productivity continues to grow. If we go thirty years out from our start point then the wages of workers the index for after tax wages would be over 300 in the 5.0 percent productivity growth story, more than three times the initial level. Even with 2.0 productivity growth after year 20 the index for after-tax wages would be at 230, almost 170 percent higher than the wage workers had received thirty years earlier.
As a practical matter, the reduced supply of labor just means the least productive jobs go unfilled. No one works the midnight shift at convenience stores. And, it is harder to find people to mow your lawn or clean your house for low pay. Life is tough.
Addendum
This is apparently a two year old piece. I have no idea why the Post decided to feature it today.
Comments