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Saturday, December 09, 2006

Varian: Who Benefits from Increased Productivity?

Hal Varian, from 2003, on the distribution of the gains from technological change and international trade:

Rising productivity is a good thing, right? Tell that to the newly unemployed, by Hal R. Varian, Economic Scene, NY Times: Recently productivity has been growing at a rate of about 4 percent a year. For the country as a whole, this means that each year we can work as much as we did last year and consume 4 percent more; or we can consume as much as we did last year and work 4 percent less.

That's got to be a good thing, right?

Well, it depends on whom you ask. In truth, those productivity gains have resulted in some people's working 100 percent less, with the rest of us consuming 4.01 percent more. If you are one of the unemployed, chances are you are less enthusiastic about the productivity gains than are those who have enjoyed the increased consumption.

Strangely, productivity growth is not getting much blame for the ''jobless recovery.'' Criticizing technological progress is downright un-American. On the other hand, criticizing foreign trade is a traditional pastime here, as in every other country.

To economists, trade and productivity growth have a lot in common: each allows you to produce more with less.

James Ingram's economics text tells the story of how an entrepreneur built a factory that was significantly more productive than his competitors' plants, and was hailed far and wide for his brilliance.

But then his dirty little secret was revealed: all he was doing was importing goods from abroad through the back door.

In terms of impact on employment, trade is usually better than productivity growth; those dollars sent abroad eventually come back to purchase American products, and employ more workers. By contrast, jobs lost to productivity increases stay lost; try to find someone today who can make buggy whips.

Gains from trade or technology initially tend to accrue to owners of capital. When a company fires a computer programmer and shifts the job to India, the company captures the difference in wages.

It wouldn't have to work that way. Suppose the programmer found his doppelgänger in India, and started exporting tasks on his own. ''Dear Sanjay, please write a subroutine to sort these accounts and send it back to me by 5 p.m. (California time).'' Each week the programmer could cash his $1,000 paycheck and send $100 to Sanjay.

This is only a thought experiment, not a policy proposal. But it illustrates the point that the controversy over trade and technology is not about whether or not they are good things -- of course they are -- but about who will capture their benefits and who will bear their costs.

There is little doubt who wins in the long run: consumers. Virtually all the gains in the standard of living in the last two centuries have come from technology. Trade has had a smaller but still significant effect on growth in per capita consumption.

Achieving the gains from technological advances can be tortuous. Back in 1886, when America's railroads standardized on one gauge, it became substantially cheaper to transport goods. A great boon for everyone, right? Well, tell that to the workers who unloaded and loaded freight at the cities where different-gauge railroads met. They rioted over the change, and understandably so -- the benefits from technological progress came at the expense of their jobs.

Eighty years later, the longshoremen's union was more farsighted. It saw new technology coming for unloading ships and negotiated lifetime employment at high wages. The result was that by 2002 a full-time longshoreman earned $80,000 to $107,000, depending on whether you ask the union or management.

The crucial issue in last year's West Coast port strike was not whether technology for managing shipyards would be introduced -- both sides were in favor -- but whether the new information-processing jobs went to union workers.

The longshoremen's union has tried to ensure that a significant part of the gains from productivity increases accrued to its members. But even the longshoremen recognize, though they might be loath to admit it, that there has to be something for both sides in the negotiation; if all the gains go to labor, there will be no incentive for capitalists to adopt more productive technology.

Capitalists have to get their piece, so they will have an incentive to pony up the money. How much labor ends up with depends on its bargaining power. If workers do not have much bargaining power, they get the short end of the deal.

In the long run, as the new technology becomes widely adopted, competition pushes prices down. The gains that originally accrued to the owners of capital are competed away, and consumers -- meaning workers for the most part -- end up with the benefits.

Look at travel agents. The Internet opened up a new channel for airlines to communicate directly to travelers. Intense competition for passengers meant that most of the gains from the new technology were passed along to consumers, with travel agents squeezed out of their jobs.

But once they find new jobs, those same travel agents will benefit from the lower prices that resulted from productivity gains elsewhere.

Workers who are at a stage of their life where they want to increase consumption, or accumulate assets, naturally resent labor-saving productivity growth or trade. But those who are about to retire, and consume more leisure, find cheaper goods attractive. It's unfortunate when trade or productivity growth causes a 50-year-old worker to lose his job; but the same economic changes can be a boon to a 62-year-old who can then afford to retire a few years early.

In the next decade, the baby boomers will start to retire and we will have to learn to produce more with less labor. Productivity growth and international trade will be important to making a successful transition to a labor-scarce economy.

But if these gains from technology and trade are to be politically palatable, we have to find a way to make sure that all can benefit from the increased opportunities they offer for consumption and leisure.

    Posted by on Saturday, December 9, 2006 at 07:09 PM in Economics, Income Distribution, International Trade, Technology | Permalink  TrackBack (0)  Comments (23)


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