Monday, February 5, 2018

Why Labor Productivity Needs To Be Redefined And GDP Eliminated

Once more labor productivity is being criticized as too low (e.g. Worker Productivity Remained Sluggish in 2017, WSJ,  Feb. 2, p A2).  Using the graph and other stats, the WSJ author (Eric Morath) is led to write:

"Soft productivity gains is an impediment to stronger wage gains and ultimately better economic growth".

Which in itself is a rather strange comment given it has been precisely "stronger wage gains" in concert with higher bond yields - that has spooked the stock market causing it to dump nearly 2.7 % of gains. (The worry being the higher wages will lead to inflation and the Federal Reserve raising interest rates - which means the cost for business borrowing and credit increases.)

He also writes (ibid.):

"When workers don't become more productive, it may be difficult for business to justify larger raises for workers. Firms may instead opt to add more employees rather than increase pay for current staff."

Which is more patent codswallop, given I earlier (Jan. 10) quoted Paula Harvey, VP of Human Resources at Schulte Building Systems in Houston:

"Companies are really hesitant to give raises. When you give a raise, it's stuck in the pay system. It is something you're guaranteeing: it's becoming a fixed cost. "

In other words, companies don't wish to give raises on account of being stuck with a fixed wage rate for their employees, not because they aren't working productively or hard enough. Today's workers are producing every bit as much as they were in early years - it's just that the metric is no longer capturing the work!

Before commencing my argument that labor productivity as currently defined is archaic, let's provide a definition:

Labor productivity is a measure of economic growth within a country. Labor productivity measures the amount of goods and services produced by one hour of labor; specifically, labor productivity measures the amount of real gross domestic product (GDP) produced by an hour of labor.

What could be wrong with that? Well, plenty! Namely, if the GDP is in error or doesn't measure what is really needed, then the labor productivity will be off too. Hence, the WSJ's (and other) sources criticism of this productivity will be baseless.   As  Financial Times contributor David Pilling writes in a recent  TIME Viewpoint article ('Why GDP Is A Faulty Measure Of Success',  Feb. 5, p. 41):

"Invented in the 1930s, the figure is a child of the manufacturing age - good at measuring physical production but not the services that dominate modern economies. How would GDP measure the quality of mental health care or the availability of day care centers and parks in your area?  Even Simon Kuznets, the Belarussian economist who practically invented GDP, had doubts about his creation."

This has import for the other claims made about falling productivity in the WSJ piece, i.e.:

"Nonfarm, business sector productivity, measured as the goods and services produced per hour worked, advanced 1.2 percent last year from 2016...That matched the average rate recorded from 2007 through 2017 and is well below the 2.1 % annual rate averaged since 1947."

Says who?  GDP is supposed to measure the total production and consumption of goods and services in the United States. But the numbers that make up the Gross Domestic Product by and large only capture the monetary transactions we can put a dollar value on. Almost everything else is left out: old growth forests that maintain cooling and act as CO2 repositories, watersheds, animal habitats, e.g. the Everglades, and costs of infrastructure maintenance. But ALL of these count toward  the physical security and welfare of a society. If bridges collapse owing to maintenance failure and hundreds or thousands of drivers are inconvenienced, delayed  - then that has an economic impact!

In addition, there are hundreds of other contributions not registered that arguably have  major economic impacts. For example, a 2015 Forbes article highlighted how 40 million family caregivers in the U.S. are putting their own careers on hold to provide unpaid care — sometimes for decades.   The estimated  total value of the care has been put at nearly $1 trillion. This isn't reckoned into the GDP but IF it were,  the labor productivity cited in the WSJ would surely be much higher in the years since 2007 - maybe even double or (1.2%) x 2  2.4 %. Which would then exceed the rate cited since 1947.

Just saying!

What to use in place of GDP? The Index of Sustainable Economic Welfare which was first proposed by Eco-economist Herman Daly of the University of Maryland. is a prime alternative  Daly's point was that the GDP was too artificial and narrow an indicator of economic health. He argued that if one incorporated all the "externalities" usually dismissed or ignored by standard economic models, people would be more parsimonious in how they consume which would yield a better world.

Ignoring these externalities leads us into a fool's paradise where we come to believe things are much better than the GDP numbers show. Similarly with energy, conveniently ignoring externalities of cost and demand leads too many to envisage a pie-eyed future of never-ending growth (based on producing material output)  and ever more intense energy consumption.

All this translates inexorably into “growth” and woe betide you if you dare intimate (as Prof. Daly has done) that a zero or negative growth index may be a lot better for humans, if they hope not to outstrip their resource support base. Right now, indeed, we already know that humans are consuming the equivalent of 1.5 Earths every year. See, e.g.

This is obviously unsustainable, which means we desperately need to replace the industrial age GDP and sooner rather than later.

No surprise that a decade ago a panel headed by Nobel Prize winning economist Joseph Stiglitz concluded we are  "mismeasuring our lives" using GDP.

If indeed it is true (and it is) that the millions of man-hours that go into Wikipedia  (which brings human knowledge to  virtually everyone) "adds not a cent to GDP" then something is seriously amiss. Because if that's so then it also doesn't add a single extra unit to labor productivity. Hence, those millions of man hours of research, writing, editing go unrecorded in our grand economic metric.  This is absurd.

We can't keep using this antiquated metric which is totally detached from reality.  "Production" simply cannot be measured in output of material units of slim Jims, Barbie dolls, Legos, Ipads, Ipods or X Boxes alone. Apart from being skewed toward one type of production it omits an entire other universe that now needs to be reckoned in - including for things like Wikipedia, unpaid care giving and generation of art or music, as well as abstract research/

See also:

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