Can employment ever catch up with productivity?

By Felix Salmon
June 22, 2011

I moderated a panel on financial innovation yesterday, about which more when I get the video. But there was a lot of talk of leverage, which is the hidden turbo-charger in a lot of financial innovations, from credit default swaps to structured investment vehicles. And there was a general consensus that if you want to create prosperity and jobs, then leverage is in principle a good thing: more debt means more growth which means more prosperity. For a prime example, see this post from Gregory White, who reckons that whenever household debt is going down rather than up, “the economy will stink.”

In reality, however, things are rather more complicated. And Jared Bernstein has a great post up explaining one of the big problems: Over the past 30 years or so, unemployment has been high, compared to the previous 30 years, when unemployment was low. When unemployment is low, productivity gains go to labor; when unemployment is high, they go to capital. And that’s a big reason why median family incomes have been massively lagging productivity growth since 1979, even though the two moved pretty much in lockstep during the postwar period.

The challenge I put to the panel yesterday was to come up with an innovation which produces more growth with less leverage, after an entire generation in which debt has been growing much faster than GDP. Better yet, come up with an innovation which produces more jobs with less leverage. We still have healthy productivity growth. How do we channel that into employment, rather than dividends for plutocrats? The fund managers and CEOs on my panel weren’t much help on that front. But that’s the real challenge facing developed economies today, and I suspect that if we look at Germany, we might be able to find a few clues.


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Education, focus and specialization certainly help. However, Germany has a much smaller economy with a much tighter focus then America. It’s much easier for them to gear towards a tighter set of labor standards. Training specifically for job needs is all well and good for them…but America has a much vaster variation in economies, and to satisfy that demand on the labor side would be MUCH harder.
I think a good start would be an income cap and a wealth cap, if you want to be serious…with no billionairs and no multi-million dollar incomes, the money is going to have to go somewhere, and that generally means getting spent.
The big thing, I think, is to take the money back out of pure capital and get it back into circulation. Once it hits the broader economy and starts getting spent, jobs will materialize. However, there is no incentive for a billionaire to spend his billions when he gets by spending his interest. As wealth converges on the wealthy, this problem only gets worse.

But, that’s the American way. People hate estate taxes and the like, but they have a very intended purpose…to break up the concentration of wealth and parcel it out into the greater economy. As long as we allow greater concentration of wealth, this problem of jobs is only going to get worse.

Also like to point out that the reluctance of people to retire and give their jobs to younger folks with families isn’t helping the situation any. Another side effect of the increasing health and aging demographics.


Posted by REDruin | Report as abusive

Debt has been growing faster than GDP because consumers did not have the income to support their lifestyles, and exporting nations were willing to finance that debt. Consumers do not have the income because of the distribution of income in the past 20 years or so has shifted more to the higher end of the spectrum. If people want to buy things, and companies want people to buy their things, then people either need to make enough money to buy them, or someone has to lend it to them. The people who have been accumulating wealth over the last two decades have been fine with the latter solution, but now people are deciding to not borrow to spend, and in some cases, are saving rather than spending. This is why there is no recovery.

Employment (and therefore unemployment) is a function of investment. The more money that people and companies invest in new ventures, the more people will be working. If you are looking for innovation that will increase employment, then you will need a tax policy that rewards investment and punishes hoarding (accumulation) of profits. Cutting taxes does not automatically lead to increased investment any more than lowering interest rates, as demand drives consumption, not supply of cash. If you want to force those with capital to invest it, you need to give them tax credits AFTER they invest, and charge them high rates in case they don’t invest.

This isn’t a rant about the inequality of wealth and income distribution. If that’s what people choose to do with their money, so be it. But those who want to hoard their profits and pay as little taxes as possible need to realize that the less they invest, the smaller the market there will be for whatever it is they are selling. If you squeeze that income distribution curve so that a few percent of the people make 95% of the money, there will be less customers for your product. And if you cut payroll to reduce costs, it will exacerbate the problem, as your workers will be even less likely to afford your product (I guess if you are one of those companies that sells to the top 5% income earners, like German manufacturers of luxury autos, you can do whatever you want).

Posted by KenG_CA | Report as abusive

What are you referring to when you mention Germany? A country that imposed drastic measures to repress wages in the past decades?

Holding down wages was a crucial component of German “competitiveness” against their neighbours in the European periphery and is arguably the root cause of the eurozone’s problems: too much money flew out of Germany to the periphery (fueling public & private debt binges, speculation, etc.) instead of raising the living standards of German consumers (and improving the periphery’s relative productivity).

Posted by lemarin | Report as abusive

Your post is highly condensed, and therefore confusing — at least I find it to be.

You invoke financial innovation, leverage, household debt, productivity, employment, growth, and (implicitly) income inequality. That’s a lot to cram into two questions (one a rephrase of the other)!

I guess I’m not sure where an answer would even begin.

Posted by jbernar | Report as abusive

I agree. Very confusing. For example, what do you mean by “gains go to capital”? The current lag is a complex issue, driven by issues in educational specialization, lack of government partnership in key areas (see what Singapore’s or China’s governments do to support key sectors), shockingly sub-par performance at exports etc. Case in point, we make it really onerous for PhDs who we trained at our taxpayers’ expense to stay in the country.
I do agree with your point on Germany – a good example is what they achieved with Mittelstands – mid-sized, highly specialized companies. Their saying is “China may be the world’s factory, but we are building China’s factories”. High spec control boards, instrument panels etc. come from the 1-2 manufacturers of that who are German… That type of high specialization at scale is missing here in the US in mid-sized companies.

Posted by FDum | Report as abusive

FDun, “gains go to capital” means the extra profit gained by productivity increases gets distributed to those who put up the money (as opposed to spreading it among more workers).

And while Germany has those companies that export factory equipment, they also have four of the world’s leading exporters of luxury (high margin) autos, plus one of the biggest auto mfrs overall (VW). that doesn’t hurt.

Posted by KenG_CA | Report as abusive

This might sound quaint, but wouldn’t limiting the labor supply (significantly restricting working-class immigration) be of some use here? Let foreigners bring their equity capital to invest, but leave the labor at home.

Sounds like a low leverage, low unemployment innovation to me.

Posted by jdubs | Report as abusive

What answer would you have gotten to that question had you asked it in 1930? What would all the farm workers, piecework clothing makers, assembly line workers, etc. do as machines gradually replaced their manual labor?

Comparing our situation to that of 80 years ago, it’s clear that education is key. Our economy is hugely dependent on, and more productive for the highly educated workforce that’s created cellphones, computers, the internet, google…

Too bad the current political prevailing winds are all about how it’s “too expensive” to invest in human capital. I guess we’re all OK with having people elsewhere harvest most of the gains from development in the next 80 years. Meanwhile we’ll keep spending on a huge global military whose productive output is roughly zero.

Posted by FosterBoondog | Report as abusive

I wonder how much the transition is hindered by the structure of our tax system? When your average American couple takes a new job, 30% of the marginal earnings flies directly to the federal government (income tax plus FICA) and another 5%-10% go to the state. If wages aren’t high, there is nothing left over after child care and transportation costs. And if wages ARE high, then employers are very reluctant to hire.

Are European taxes structured differently? From an employment standpoint, it would seem to make perfect sense for me to take a $60k/year job and in turn creating additional employment (child care, cleaning services, restaurants) totaling another $30k/year job. Yet under the present system, minimizing household expenses must necessarily take priority over increasing employment. Spending $30k on services and $5k on transportation would actually COST us money after taxes.

Posted by TFF | Report as abusive

The comments here would be amusing if they weren’t so sad: limit incomes, limit capital mobility, limit immigration. All non-innovations designed as rent-seeking mercantile policies. That’s *not* the way to boost employment.

The greatest non-levered innovation in finance has been the ATM. It allows people to access checking and savings accounts without tellers. (Of course, our President thinks that technology that substitutes capital for labor is a problem …)

Along the same lines, cloud-based financial management (budgeting, expense control, investments) could allow people to have the information necessary to manage their finances from a smartphone/tablet/computer on-the-fly. But only if hard encryption and hardware redundancy make it secure.

Posted by Publius | Report as abusive

Please expand on how the president thinks that technology that substitutes capital for labor is a problem.

The security issues with cloud-based financial management have nothing to do with hard encryption (I work in the secure network equipment industry, what is “hard” encryption?) and hardware redundancy. Almost every breach of security that has resulted in exposure of personal information has been due to human error, usually not following security procedures. Accounts are not being hacked because encryption isn’t strong enough, or computers are failing with no backup. Banks and other companies have lost files to criminals due to incompetency.

Having the capability to manage your finances anywhere is of little value if you don’t know how to manage them, which covers most of the nation. Even the brightest guys on Wall Street proved they didn’t know what they were doing when they were buying junk bonds. Of course, they weren’t buying those bonds with their own money, so that made the risk easier to accept.

Posted by KenG_CA | Report as abusive

Having moved from Australia to Germany almost 2 years ago the main differences that Felix might be referring to:

- a strong school education system with equivalent quality universities (that don’t leave students with crippling debts) or pervasive apprenticeships (in all industries, not just traditional “hand work” ones)

- a distaste for debt. People here prefer cash (or the electronic version thereof) and it’s quite common to be unable to use a credit card. A modest mortgage is the limit most people undertake and unmanageable credit card debts are a rarity. This seems to extend to companies too which leads me to…

- a preference for organic growth. The Mittelstand are mentioned so often because these are small-medium companies who punch above their weight in their respective markets but still maintain a focus on longevity all the while compensating all employees generously. In most cases they avoid taking on debt which allows them to ride out cyclical events better although they do get some help from…

- government initiatives like “kürzarbeit” (literally “short work”) helps to smooth out the impact of the business cycle on employment. Businesses reduce hours instead of laying people off and employees get some assistance from the government. The business wins by retaining skilled staff, the employees win by not being laid off and the government wins by spending less than full unemployment benefits.

Posted by MartinBarry | Report as abusive