As mentioned in chapter 1, over long periods of time job growth seems to depend mainly on how many people are available to work, that is, the growth of the labor force. That's because the trend growth rate of the economy is determined by the labor-supply growth rate and the growth in its productivity. Interestingly, low labor-force growth seems to put pressure for stronger productivity growth. This seems to have been the case in the 1950s, when the low-birth cohort from the Great Depression came of age to work. Despite a slow-growing workforce, productivity was higher, and the economy grew at a respectable rate. Conversely, when the huge babyboom generation was coming of age in the 1970s, productivity growth dropped significantly, suggesting cheaper, abundant labor was substituted for relatively more dear capital.
Reminds me of what Menzie Chinn said (January 2017) about Donald Trump's 3½-to-4% growth target:
In order to hit the lower bound of the Trump target for 2017-2020, either contributions from labor force growth, or labor productivity, or combination thereof, must accelerate by 1.8 percentage points.An increase in output requires either an increase in hours worked or an increase in output per hour, or both. Chinn called this "growth accounting". Here's the graph he showed:
Okay, so Chinn and McGee agree on the growth accounting. But that's not why I'm quoting McGee. I'm quoting McGee because he says low labor-force growth seems to create pressure for stronger productivity growth. He says it's interesting, and I agree; but I think he means to suggest it is surprising. I certainly found it surprising.
I accessed the FRED index series Nonfarm Business Sector: Real Output Per Hour of All Persons, changed it from quarterly to annual data, and imported it into Excel. Figured "percent change from year ago" values, and took averages for time periods to match the graph Chinn showed. Except I stopped at 2017, the last year for which I had data.
Then I got the FRED series Civilian Labor Force and set it up the same way. I put the two together on a graph, and copied the 2017 value out to 2027 so my graph ends when Chinn's graph ends.
Do productivity growth and labor force growth tend to move in opposite directions?
Well, yes they do. Except during the special circumstances of 2007-2008, all of the changes are in opposite directions.
They do move in opposite directions. From the annual data, I would never have guessed:
2 comments:
See also "What Drives Long-Run Economic Growth?" at the St Louis Fed:
"There are three main factors that drive economic growth:
Accumulation of capital stock
Increases in labor inputs, such as workers or hours worked
Technological advancement
Growth accounting measures the contribution of each of these three factors to the economy."
THREE factors.
See also: Remember when some people were saying the post-2008 decline of Labor Force Participation had nothing to do with economic conditions being so bad? It was baby boomers retiring, they insisted. That post takes a more or less opposite view.
McGee's view is that job growth depends on the growth of the labor force. So if we all get up now and go looking for work, employers will decide to offer more jobs? Why? Because they feel sorry for us, but admire our determination? What part of economic theory is that?
Why does it not matter (to McGee) that the issue has already been resolved?
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