Putting productivity first

Employment & Income,Inclusive Economy21 Jul 2014Robert D. Atkinson

Evidence shows that technological change and productivity growth do not only destroy jobs in Europe and the US, but also create them.

Productivity growth is the source of increased economic welfare. And it is even important for working people because unlike the ‘1%’ who can thrive by rent-seeking and other extractive behaviours, the only real source of improved living standards for the other 99% is higher productivity.

Unfortunately European productivity performance has been decidedly subpar. The productivity gap between the US and Europe has nearly doubled in the past two decades, with European organizations producing just 79% of US output per hour of work, down from 89% in 1995. Europe’s lagging productivity growth will become more of a problem, given that by 2050 people 65 years or older will make up 29% of the EU population compared with only 20% in the US. Without faster productivity growth, either European workers will receive less in after-tax wages or retirees will receive less in benefits.

Yet, too many in Europe see productivity growth and job growth at odds. With European job growth still anemic some have latched on to a compelling explanation: ‘the robots are taking our jobs’. According to this line of thinking, high productivity driven by increasingly powerful IT-enabled machines is eliminating jobs faster than they can be created. Holders of this view believe that when technology allows more work to be done with fewer workers, those jobs are gone and the workers are added to the unemployment rolls.

Unfortunately they are subscribing to what economists call the ‘lump of labour’ fallacy: the idea that there is a limited amount of work to be done and if a job is eliminated, it is gone for good. But this is a false reading of the process of technological change because it does not include second order effects whereby the savings from increased productivity are recycled into the economy in the form of higher wages, higher profits, and/or reduced prices to create new demand that in turn spurs the creation of other jobs.

And US history bears out the notion that productivity growth goes hand-in-hand with growth in employment, as the Information Technology and Innovation Foundation (ITIF) shows in the report ‘Are robots taking our jobs, or making them?’ (pdf). Indeed, America’s most productive years have been followed by years of low unemployment. Moreover, virtually all scholarly research looking at the relationship between productivity and job growth finds no negative relationship.

An OECD study (pdf) sums it up: “historically, the income-generating effects of new technologies have proved more powerful than the labor-displacing effects: technological progress has been accompanied not only by higher output and productivity, but also by higher overall employment.”

For Europe this means two things. First, for Europe to thrive it means putting productivity growth first, even if some firms and workers may be hurt. Second, it means that EU policy needs to put less emphasis on creating the next ‘Google’ or ‘Facebook’ and more on getting all European firms – big and small – to be robust, smart technology users.

In short, if Europe wants a future of good jobs, it needs to put productivity first.