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Tuesday, December 11, 2007

"Productivity vs. Employment Growth: A Zero-Sum Game?"

New Economist discusses a new paper by Ian Dew-Becker and Robert J. Gordon on a potential tradeoff between employment growth and productivity growth, and what it could mean for growth policy:

Productivity vs employment growth: a zero-sum game?, by New Economist: All economists know productivity matters. But they also know it isn't easy to measure, nor to explain the often large and persistent productivity gaps between nations. A new paper by Harvard's Ian Dew-Becker and Northwestern University's Robert J. Gordon makes a provocative contribution to the productivity debate. Presented at a meeting of the NBER Program on Technological Progress and Productivity Measurement in Boston last week, the authors argue there is a "strong negative tradeoff between productivity and employment growth". The ... paper [is] The Role of Labour‐Market Changes In the Slowdown of European Productivity Growth...

The policy implications of their research are stark:

The strong evidence that we find for a productivity‐employment growth tradeoff changes the questions that European policymakers should be asking. They should no longer ask how they should boost productivity growth or raise employment growth. Most policies will push productivity and employment in opposite directions, and we have shown that these offsetting effects make the effects of policies on growth in output per capita ambiguous. Our new policy framework suggests that policy changes be assessed as much on their effects on government budgets as on productivity or employment, since the productivity-employment tradeoff causes some policy changes to have a negligible effect on growth in output per capita.

I'm not sure I'd necessarily agree with the authors 'zero sum' conclusions. There are for example some economies which perform better on both productivity and employment growth than others; so it's not always such a direct trade-off. One implication - that higher employment rates or higher productivity in large part reflect different national preferences - has certainly been argued before. But if their general 'zero-sum' argument proves to be more the rule than the exception, it has profound implications for policy makers throughout the OECD - especially in Europe.

Update: In comments, Ian Dew-Becker says:

I guess I should probably make it clear that we never in the paper say that anything is "zero-sum" or that raising employment by 1% lowers productivity by an equal amount.  Nor do we say that there are never times when both productivity and employment rise.  What we simply do is ask what happens if there is an *exogenous* change in employment.  In that case, theory tells us that we should expect productivity to fall by about 1/3 of one percent for every 1% rise in employment.  Our point estimates are closer to 2/3, but they have large standard errors. 

We directly address the criticism that there can be times when technological improvements raise employment and productivity simultaneously.  A good chunk of the paper is spent on statistical methods to deal with that problem.

    Posted by on Tuesday, December 11, 2007 at 01:08 PM in Economics, Productivity, Unemployment | Permalink  TrackBack (0)  Comments (24)

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