Blog Post

The puzzle of technical dis-employment and productivity slowdown

What’s at stake: Larry Summers made an important speech a few weeks ago at a Peterson Institute conference on the productivity slowdown arguing it is hard to see how recent technical change could both be a major source of dis-employment and not be associated with productivity improvement.

By: Date: December 7, 2015 Topic: European Macroeconomics & Governance

A paradox

Larry Summers writes that it’s really hard to square the view that the “new economy is producing substantial dis-employment” with the view that “productivity growth is slowing”. The fact that you move through an airport with much less contact with ticket takers, the fact that you can carry on all kinds of transactions with your cellphone, the fact that you can check out of an increasing number of stores without human contact, the fact that robots are increasingly present in manufacturing, make a fairly compelling case that the increasing dis-employment we see is related to technical change. And yet, if technical change is a major source of dis-employment, it is hard to see how it could be a major source of dis-employment without also being a major source of productivity improvement.

Adam Posen writes that it is a real puzzle to observe simultaneously multi-year trends of rising non-employment of low-skilled workers and declining measured productivity growth. Either we need a new understanding, or one of these observed patterns is ill founded or misleading. In my view, we should trust labor market data more than GDP data when they come in conflict—workers are employed and paid, and pay taxes (usually) so they get directly counted, whereas much of GDP data is constructed. Thus productivity, as the residual of GDP minus capital and labor accumulation, is much less reliable than the directly observed count of workers.

The accelerating mismeasurement hypothesis

Larry Summers writes that it is at least possible that there are substantial mismeasurement aspects and that there is a reasonable prospect at accelerating mismeasurement as an explanation for some part of this puzzle. As we move from tangible manufactured goods to intangible services, it seems to me plausible that the fraction of the economy where we’re doing really badly on quality is likely to be increasing and that means that mismeasurement is increasing.

Larry Summers writes that it’s almost impossible to disagree with the view that the price indices overstate inflation and therefore the quantity indices understate quantitative growth. It is significantly more contestable whether that process has accelerated or not, but I don’t find myself with an alternative way of thinking about the dis-employment through technology which seems to be a pervasive phenomenon and that leads me to assign more weight to the mismeasurement hypotheses than I otherwise would. The other explanations could be that there really isn’t a set of dis-employment events or that there is a production function that can generate higher productivity together with slower productivity and more dis-employment.

Jan Hatzius and Kris Dawsey write that increased measurement error might indeed account for most of the ¾pp decline seen in consensus estimates of trend productivity growth over the past decade. The shift in the IT sector’s center of gravity from general-purpose IT hardware to specialized IT hardware, software and digital content—where it is far harder to measure quality-adjusted prices and real output—may have resulted in a growing statistical understatement of the technology contribution to growth.

  • The sharp slowdown in the measured deflation of semiconductors and computers may be a spurious consequence of shifts in industry dynamics rather than a genuine slowdown in technological progress. The lack of any significant quality-adjusted price decline in more specialized IT hardware industries also looks implausible. Our best guess is that these two issues together are worth about 0.2pp per year on real GDP growth.
  • The problems in the software and digital content industry are thornier but potentially more sizable. One is that the official statistics seem to make little attempt to adjust for quality improvements in these products over time. Another is that the proliferation of free digital content has arguably introduced a more extreme form of “new product bias” into the inflation statistics. These two issues might be worth another 0.5pp per year.

BEBR_5_12_15_1

John Fernald writes that David Byrne at the Board of Governors plus various co-authors of his have done a lot of work on that and suggest that, indeed, this is important and it probably adds up to one-tenth or two-tenths of GDP. So, that on its own will not change the productivity numbers. Remember, the magnitude of what we need to explain is a slowdown after 2003 or 2004 of two percentage points on labor productivity growth and maybe 1.25 or 1.5% on TFP. So, one- or two-tenths won’t close that gap.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More by this author

Blog Post

It’s hard to live in the city: Berlin’s rent freeze and the economics of rent control

A proposal in Berlin to ban increases in rent for the next five years sparked intense debate in Germany. Similar policies to the Mietendeckel are currently being discussed in London and NYC. All three proposals reflect and raise similar concerns – the increase in per-capita incomes is not keeping pace with increases in rents, but will a cap do more harm than good? We review recent views on the matter.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: July 8, 2019
Read article More on this topic More by this author

Blog Post

The breakdown of the covered interest rate parity condition

A textbook condition of international finance breaks down. Economic research identifies the interplay between divergent monetary policies and new financial regulation as the source of the puzzle, and generates concerns about unintended consequences for financing conditions and financial stability.

By: Konstantinos Efstathiou Topic: Finance & Financial Regulation Date: July 1, 2019
Read article More on this topic More by this author

Blog Post

The June Eurogroup meeting: Reflections on BICC

The Eurogroup met on June 13th to discuss the deepening of the economic and monetary union (EMU) and prepare the discussions for the Euro Summit. From the meeting came two main deliverables: an agreement over a budgetary instrument for competitiveness and convergence and the reform of the European Stability Mechanism (ESM) treaty texts. We review economists’ first impressions.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: June 24, 2019
Read article More on this topic More by this author

Blog Post

The campaign against ‘nonsense’ output gaps

A campaign against “nonsense” consensus output gaps has been launched on social media. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy. But the debate about the reliability of output-gap estimates is more wide-ranging.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: June 17, 2019
Read article Download PDF More on this topic

Policy Brief

A strategic agenda for the new EU leadership

Memo to the presidents of the European Commission, Council and Parliament. 'A strategic agenda for the new EU leadership' by Maria Demertzis, André Sapir and Guntram Wolff is the first of our 2019 Bruegel memos to the new presidents of the European Commission, Council and Parliament. Focusing on the most important economic questions at EU level, these Bruegel memos are intended to be a strategic to-do list, outlining the state of affairs that will greet the new Commission.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2019
Read article More on this topic More by this author

Blog Post

The inverted yield curve

Longer-term yields falling below shorter-term yields have historically preceded recessions. Last week, the US 10-year yield was 21 basis points below the 3-month yield, a feat last seen during the summer of 2007. Is the current yield curve a trustworthy barometer for future growth?

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: June 11, 2019
Read article More on this topic More by this author

Blog Post

The 'seven' ceiling: China's yuan in trade talks

Investors and the public have been looking at the renminbi with caution after the Trump administration threatened to increase duties on countries that intervene in the markets to devalue/undervalue their currency relative to the dollar. The fear is that China could weaponise its currency following the further increase in tariffs imposed by the United States in early May. What is the likelihood of this happening and what would be the consequences for the existing tensions with the United States, as well as for the global economy?

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: June 3, 2019
Read article More on this topic More by this author

Blog Post

The next ECB president

On May 28th, EU heads of state and government will start the nomination process for the next ECB president. Leaving names of possible candidates aside, this review tries to isolate the arguments about what qualifications the new president should have and what challenges he or she is likely to face.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 27, 2019
Read article More on this topic More by this author

Blog Post

The latest European growth-rate estimates

The quarterly growth rate of the euro area in Q1 2019 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 20, 2019
Read article More by this author

Blog Post

Is an electric car a cleaner car?

An article published by the Ifo Institute in Germany compares the carbon footprint of a battery-electric car to that of a diesel car, and argues a higher share of electric cars will not contribute to reducing German carbon dioxide emissions. Respondents rejected the authors’ calculations as unrealistic and biased, and pointed to a series of studies that conclude the opposite. We summarise the article and responses to it.

By: Michael Baltensperger Topic: Energy & Climate, Innovation & Competition Policy Date: May 13, 2019
Read article More on this topic More by this author

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: May 6, 2019
Read article More on this topic More by this author

Blog Post

Is this blog post legal (under new EU copyright law)?

How new EU rules on using snippets from news publishers and on copyright infringement liability might affect circulation of information, revenue distribution, market power and EU business competitiveness.

By: Catarina Midoes Topic: European Macroeconomics & Governance Date: April 8, 2019
Load more posts