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THINKING DIFFERENTLY
ABOUT
PRODUCTIVITY GROWTH
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By Bryan Bezold
RCGA Director of Research and Chief Economist
The economic boom that St. Louis and the U.S. enjoyed during the
late 1990s was driven by strong productivity growth. This increase
in productivity, or output per hour, allowed the economy to grow
rapidly without sparking inflation. The reason is simple: when workers
produce more in a given unit of time, their employers can raise
their wages without passing price increases to consumers. Increased
wages mean increased spending, and that spending supports the creation
of jobs in other industries. It is no coincidence that as productivity
grew, both the U.S. and St. Louis experienced output and employment
growth that exceeded trends of previous decades.
But in the last few months, productivity has gotten a bad rap. Articles
in the mainstream press have blamed productivity gains for weak
job growth over the last year. Why? Because in the short run, improved
productivity gives firms two choices: either produce more goods
with the same number of workers, or produce the same amount of goods
with fewer workers.
Obviously, we’d all prefer the first of those two outcomes.
But in economic environments like those of the last two years—with
relatively low aggregate demand growth—some firms have been
forced to choose the latter. But here’s the good news: in
either case, economic theory dictates that the workers in such firms
will experience real (meaning inflation-indexed) wage growth.
Evidence for this can be seen when one looks at the manufacturing
sector in Greater St. Louis. To paraphrase a famous Missourian:
reports of its demise are greatly exaggerated. For many years in
the U.S., overall manufacturing employment has declined. But at
the same time, the value of goods produced by manufacturers has
increased. Data from the U.S. Bureau of Economic Analysis (BEA)
illustrates this quite clearly. During the 1990s, income in the
St. Louis manufacturing sector rose, while employment declined.
Thus, each worker’s share of income in the manufacturing sector
grew even faster, easily outpacing the rate of inflation during
the decade. Again, when workers’ income grows, their spending
also grows, supporting other businesses around the region.
The 10-year change in manufacturing income, from 1990 to 2000, was
19 percent, while at the same time manufacturing employment declined
by about 18 percent. Income per worker rose by 45 percent, easily
exceeding the 10-year change in the St. Louis Consumer Price Index
of 26 percent. (See chart.) Keep in mind that this took place
during a challenging period for St. Louis, as reduced defense expenditures
in the early 1990s severely impacted the region.
Further, the productivity boom of the 1990s was not limited to the
manufacturing sector. As information and other technologies became
more widely used, a variety of industries saw increased labor productivity.
Recent econometric studies have also documented productivity increases
in the service sector.
As we can see, productivity growth is indeed good news. Still, we’ll
all be much happier when firms’ demand is such that their
output growth exceeds productivity growth, and more rapid hiring
takes place. There are several signs that suggest that will happen,
both locally and nationally, in 2004.
Aided by strong fiscal and monetary stimulus from the federal government
and Federal Reserve Board, gross domestic product (GDP) growth was
very strong during the last half of 2003, growing by 8.2 percent
in the third quarter and 4.0 percent in the fourth quarter. According
to the Blue Chip Economic Indicators, the consensus forecast of
U.S. growth in 2004 is 4.6 percent. That level of output growth
will be high enough to support job growth, and St. Louis’
diverse economy will grow as well.
In fact, job growth in some industries was already happening as
2003 wound down. Locally, the wholesale trade, truck transportation,
utility, and professional & business services industries were
employing more people than a year earlier. By the end of 2004, that
will likely be the case for total regional employment.
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