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Higher productivity, a richer country

  • Published at 12:19 am April 1st, 2018
Higher productivity, a richer country
If we all want to see higher economic growth -- which we do -- then we’ve got to understand what economic growth itself is. This seems both reasonable and obvious, but it isn’t to all of those who would comment upon the economic numbers. Such has been the commentary on the latest Labour Force survey numbers, sadly. The criticism is that while growth itself has been good, not enough jobs have been created by that growth. This is entirely the wrong way around to look at it, jobs are a cost of economic growth, not a benefit of it. Yes, of course, workers like having a job. Well, in fact, no, they don’t. They don’t like having a job so much that we’ve got to pay them to come and do the work. Workers like being able to consume things, that’s certainly true. Workers therefore like to have an income. But a job is only a method to gain an income, it’s not something desirable in itself -- the job, having to do the work, is a cost of getting an income. Employers of course hate jobs, they’re a cost too. They like getting the work done for that’s how they make a profit. But in order to create a job, to get someone in to do the work, they’ve got to pay wages. That’s a cost. Jobs are, again, a cost. Jobs are also a cost at the level of the entire economy. Absolutely, we want everyone to be able to consume lots and lots of things. That means we want them to be produced. But that everyone has to go to work in a factory or office to produce them is a cost. As always, we want to minimize costs.
It’s worth considering what Paul Krugman has said, productivity isn’t everything but in the long run it’s pretty much everything
So, over the last year the LFS shows us that against that background of good economic growth, a 7.28% rise in GDP, we’ve actually seen a rise in the number unemployed, a rise of 100,000 to 2.7 million. This is actually good news, not something to criticize. It shows that the growth itself is solid, coming from a rise in productivity, and also that there’s the spare capacity for growth to go higher again. It’s worth considering what Paul Krugman has said, productivity isn’t everything but in the long run it’s pretty much everything. It’s the major determinant of the standard of living for example. Imagine, just as a thought experiment, that we’ve the labour of 100 people in the economy. Productivity is the measure of how much value they can produce in any one hour of work. If we raise that productivity then we are all richer. For GDP is all production, all incomes, or all consumption. By design, by definition, they’re all the same, all production is consumed, all payment for consumption becomes an income to someone in the economy and so on. They simply are equal to each other. So, if we’ve raised productivity, thus production from our hours of labour, then we must have raised incomes and consumption by the same amount. Good, higher productivity makes us all richer. Bangladeshis, using this measure, are 7.28% richer this year than last. But note also our point about jobs being a cost. We would like to have that increase in our collective wealth while using fewer inputs. We’d think it a good idea if we did this by using less steel, fewer plastics, so too the same is true if we can do this by using less labour. This is just the other side of that productivity argument. More output per hour of labour is better. So, we’re getting growth and we’re getting it without using all the labour available to us. That means that our growth simply must be coming from that higher productivity. We’re being more efficient in our use of labour. That’s great, of course it is, for as Krugman points out, that’s what does make us richer in the future, that higher productivity of labour. In fact, that’s a very useful definition of a rich country, one with high labour productivity. Another name for a place with low labour productivity is a poor place. So, if we see that we’ve got high economic growth without using all the labour available -- this is a good sign, it’s not something to complain about. It means that we’re climbing that economic ladder, getting to being a richer country as we raise labour productivity. But there’s more to it than just this. For we’ve also got those would-be workers without jobs. They’ve not got an income, so they’re not able to consume. That’s bad, obviously, because we’d like all those to be getting richer along with the society in general. Yet it’s important to note one further thing. We’ve now got spare inputs that can be added to the economy. Think of it this way, how much we can produce depends on a number of things but one of the hard limitations is what we can use to produce things with. We cannot use more copper than we have copper. We cannot use more labour than we have labour. So, if we’ve an economy at entirely full and total employment then we must be growing as fast as it is possible to be doing. If we’ve spare labour, those other 100,000 people, then that means there’s still some slack which can be used to make the economy grow even faster. Yes, of course, we’d like to be growing as fast as we can. But there is that silver lining to the unemployment cloud, that it is evidence that we can be growing even faster than we are. And the reason we can do so is because our labour productivity is improving even faster than the economy is growing. We might not like that there are people unemployed in Bangladesh but that we have both that and a 7.28% GDP growth is evidence, pure and simple, that the GDP growth rate could be even higher.   Tim Worstall is a Senior Fellow at the Adam Smith Institute in London and a columnist at The Continental Telegraph.