Brad DeLong's Semi-Daily Journal: A Weblog

An economics post! Nice to see economics is making a comeback, Brad.

What's causing this productivity growth? I think that workers are working longer hours for no additional pay.

My wife works at a retail place. They have a rule that they are not allowed to work more than 39 hours per week. But they're fired if they don't finish their jobs, and they keep putting more work on their shoulders. The result? They clock out after 39 hours, but keep working.

That's the source of the productivity growth.

- Josh

Since I figure I'll be taking my JD down to Domino's to work as deliveryman, I'm stoked I won't be wasting my tips on gas due to getting lost.

Josh, that's illegal... has been for a long time. I doubt there are many retailers out there doing it, because anyone they've been doing it to can sue for back wages PLUS penalties. After she's been working there for a year or two, call up a lawyer and cash in all those hours.

"Josh, that's illegal... has been for a long time"

My wife works at IBM and everybody is "management". She works at least 12 hours a day for no raises and bonuses that are 20% what they were 3 years ago. Nobody complains because every month a few more jobs go to Brazil. Offshoring is wonderful - productivity growth with NO benefit to the workers.

Josh and Me

Contrast our all too common examples with the contract worked out between Volkswagon and workers in Germany.

http://www.nytimes.com/2004/11/04/business/worldbusiness/04volkswagen.html

Volkswagen Averts Strike by German Workers
By MARK LANDLER

FRANKFURT - Volkswagen averted the first full-scale strike in its history on Wednesday, offering its factory workers a seven-year job guarantee in return for a 28-month freeze in wages.

The agreement, which came after a marathon bargaining session, achieves two equally important objectives for Volkswagen: it will reduce labor costs nearly one-third by 2011 and it will preserve labor harmony at a company that is a German industrial icon.

Volkswagen's union, IG Metall, had staged warning strikes at several factories to press for a pay increase of 4 percent. But even as it threatened broader disruption, the union later gave up this demand - accepting a face-saving compromise that it must now try to sell to its members.

In a largely symbolic gesture, Volkswagen will make a one-time payment of 1,000 euros to the 103,000 workers covered by the contract. The company also pledged to invest in six plants in western Germany, which workers fear are in danger of losing production to lower-cost factories in the Czech Republic, Slovakia and other Central European countries.

"We achieved our goal of securing jobs, not just for today but for the future," Hartmut Meine, the chief negotiator of IG Metall, said to reporters in Hanover, where the talks were held.

Volkswagen said the agreement freed it from a labor contract that provided higher pay rates than those at any other German carmaker and imposed rigid rules on overtime and the hiring of new employees.

"From now on, new employees will work on the same level as our competitors," said Dirk Grosse-Leege, a spokesman for Volkswagen. "We never asked as much from workers as in this round of negotiations."

Volkswagen's face-off with the union was closely watched here as a test of whether German auto workers - and VW employees in particular - could maintain their privileged position as the best-paid, best-treated workers in an increasingly competitive global industry.

Other carmakers, including DaimlerChrysler and the Opel division of General Motors, have demanded concessions on wages and work rules, as they struggle to reduce labor costs. G.M. said recently it would reduce its European work force by 12,000 jobs, most of them in Germany. In the Volkswagen negotiations, however, Germany's long tradition of worker-management consensus prevailed over the union's protests and the company's not-so-veiled threats of job cuts.

"The fact that they did reach an agreement, given the complexity of the issues and the hardness of the positions, shows a remarkable ability to work together," said Michael Fichter, an expert in labor relations at the Free University of Berlin. "It is an example of the social partnership culture."

Average workweek in October was 33.8 hours, little changed from earlier this year, just about the lowest on record. Meanwhile, job growth is picking up nicely. Normally, hours lead employment. If hours are reported more arbitrarily now than in the past, that would explain things.

Question is it possible that the adjustments made to how inflation is calculated were incorrect and that thus the inflation rate is understated?

Wouldn't real productivity then be lower than we think?

Fred:

My wife works at Michael's. It's a very large retail craft-store chain. They're definitely doing it.

I also have a friend who worked at Kinkos. Same story. Of course, I understand that Kinkos was recently bought by FedEx, so maybe their policies have changed, but it was definitely the norm there prior to the buyout.

On the subject of sustainable productivity the heartland conservative in me says as long as there are problems to solve Americans will come up with better and better ways to solve them. The rest of me says read this:

http://www.morganstanley.com/GEFdata/digests/20041104-thu.html#anchor0

Josh, productivity growth measures the change in productivity year-over-year. Unless you think people are working many more hours off-the-clock this year than last, your reasoning can't explain why productivity has grown so briskly in the last twelve months. (And if, as you say, Kinko's was doing this years ago, then it's unlikely that there's been some radical worsening of the state of affairs since 2003.)

Gar Lipow wrote, "Question is it possible that the adjustments made to how inflation is calculated were incorrect and that thus the inflation rate is understated?

"Wouldn't real productivity then be lower than we think?"

Yes, and yes.

Note that someone as well respected as PIMCO's Bill Gross holds these views.

Steve,

If (as I mentioned earlier) hours worked lead hiring, but measured hours are near historic lows, then this year's pick-up in hiring suggests that people are working longer hours this year than last, and it simply isn't being reported. It is hard for some of us to believe, because it was in 2001 and 2002 that pressure was put on us to work longer hours, but there could still have been plenty of workers who had not been pushed to the limit till this year. Ask yourself how labor's share of national income got so low. The pattern of rapid productivity growth continued through the recession and slowdown, suggesting that there may have a steady ramping up of unreported hours through the period. That would make this year's change just incremental, rather than radical.

The economy is growing (some) and employment isn't (much). So productivity rises -- irrespective of wages, btw. The uncertainty of growth, and rising hiring/employment costs (especially health insurance, for most employers)makes hiring new permanent full-time workers a last resort.

The economy is growing (some) and employment isn't (much). So productivity rises -- irrespective of wages, btw. The uncertainty of growth, and rising hiring/employment costs (especially health insurance, for most employers)makes hiring new permanent full-time workers a last resort.

The economy is growing (some) and employment isn't (much). So productivity rises -- irrespective of wages, btw. The uncertainty of growth, and rising hiring/employment costs (especially health insurance, for most employers)makes hiring new permanent full-time workers a last resort.

Can someone help this math-challenged reader?

Assume inflation is 40% higher than reported.

How much is the productivity rate reduced?

Isn't the productivity explosion an artifact of our new trade policies? We tend to import labor-intensive products from low-wage countries like China, while concentrating upon capital-intensive production processes here at home, because of the comparative advantages involved.

But since output per manhour tends to be higher in capital-intensive industries (an effect of all the machinery being used) it appears that worker productivity is going up. But in actuality all that extra productivity belongs to capital. Meanwhile, the average marginal produtivity of labor (upon which wages depends) goes down. Confusing? Not if you are an economist.

Which is why wage subsidies and a progressive consumption tax are necessary if we are going to continue down the road of Nafta and Gatt. Come on guys, get hip. WE got to divy up the gains of trade.

Isn't the productivity explosion an artifact of our new trade policies? We tend to import labor-intensive products from low-wage countries like China, while concentrating upon capital-intensive production processes here at home, because of the comparative advantages involved.

But since output per manhour tends to be higher in capital-intensive industries (an effect of all the machinery being used) it appears that worker productivity is going up. But in actuality all that extra productivity belongs to capital. Meanwhile, the average marginal produtivity of labor (upon which wages depends) goes down. Confusing? Not if you are an economist.

Which is why wage subsidies and a progressive consumption tax are necessary if we are going to continue down the road of Nafta and Gatt. Come on guys, get hip. We got to divy up the gains of trade.

When, oh when, will we ever learn?

Luke,

Would you care to take a stab at the uptrend in payrolls?

http://www.epinet.org/content.cfm/webfeatures_econindicators_jobspict_20041105

In the service sector, businesses added 97,000 jobs last month, but about half of them (48,000) were in temporary work, suggesting employers' continued reluctance to commit to permanent hires. Since the recovery began three years ago in November 2001, temp work has been one of the fastest growing sectors, up 18.6% compared to 0.9% for overall payrolls. Since temp jobs pay less than average, the rapid growth in this sector has been one reason for the job-quality problems that have evolved over the recovery. For example, as temp work as a share of total employment has increased from 1.6% to 1.9% over the recovery, manufacturing's share has declined, from 12.1% to 10.9%.

Despite the strong payroll expansion, there is still evidence of slack remaining in the job market. The number of part-time workers who would rather work full time (a group that includes some temp workers) rose by 280,000 last month.

KHarris

"If hours worked lead hiring, but measured hours are near historic lows, then this year's pick-up in hiring suggests that people are working longer hours this year than last, and it simply isn't being reported."

Remember, according to the labor department we are all management now. Likely explains why so many of us voted red :)

That EU is going to kick our butt in a few years. Their workers have more rights, health insurance, and security. All this makes for happy people, and more willingness to work hard for the good of each other and your society.

The US, on the other hand, is taking away rights of workers, sending jobs overseas, promoting insecurity. All bad.

I think that China will not challenge us as much as we think because they are not a free society. A basic respect for human rights seems to be the main requirement for a great nation.

I'm mad at the people who let NAFTA and fast track and all that crap pass without making health insurance, extended unemployment benefits, and requiring new investment by corporations in America with the extra capital a feature of these agreements. I don't believe that they really care about the American worker.

Steve - I understand what you're saying. I can't possibly work 3% next year, and then 3% harder than that the next year, and so forth. It's not sustainable.

But the recovery has only been going on for about two years now. So let's say that two years ago, I was working 40 hour weeks. To achieve 3% productivity growth, I'd have to work 41.2 hour weeks the next year. Then, to achieve 3% again, I'd have to work 42.4 hours this year. That's 2.4 extra hours per week.

There is no question in my mind that my wife is putting in 2.4 hours of unpaid work. There are plenty of people in the store who do much more than that. Corporate pressure is very nasty these days.

http://www.nytimes.com/2004/11/04/business/worldbusiness/04outsource.html

An Industry in India Cheers Bush's Victory
By SARITHA RAI

BANGALORE, India - India's outsourcing companies were jubilant Wednesday that the elections in the United States will return President Bush to office.

'This is great news for the offshoring industry,' said Nandan M. Nilekani, chief executive of Infosys Technologies, a software services company. The trend toward outsourcing will now become even more inexorable, Mr. Nilekani said.

Offshore outsourcing, or the moving of work from the United States to low-cost centers like India, was an issue in the presidential election. The Democratic candidate, Senator John Kerry, blamed Mr. Bush and outsourcing for the loss of thousands of American jobs.

Mr. Bush, in contrast, was largely silent on the issue. But members of his team, among them N. Gregory Mankiw, the chief economic adviser, and Treasury Secretary John W. Snow, have both defended outsourcing as another form of free trade....

India's software and back-office services industry posted $12.5 billion in export revenues in the year ended in March, a 30 percent rise over the previous year as global demand for its services grew.

News that Mr. Kerry had conceded the election to Mr. Bush was greeted with joy in the industry. 'We are very happy that Bush is back,' said Kiran S. Karnik, president of the industry group Nasscom, or National Association of Software and Service Companies.

'The president's track record has been of recognizing the advantages of free trade,' Mr. Karnik said.

Mr. Bush's re-election will bring out the latent demand for outsourcing and lead to more offshoring announcements by companies, he said.

'Some corporations have been cautious about signing or announcing deals in the last few months,' he said, adding, 'Now they will no longer hold back.'

http://www.nytimes.com/2004/11/02/business/worldbusiness/02india.html?pagewanted=all&position=

India Taps China's Reserve of Technological Talent
By SARITHA RAI

BANGALORE, India - When Infosys Technologies began scouting for an alternative to India as a source of unlimited, low-cost human resources, the fast-growing company came up with one answer: its home country's archrival, China.

Now, a year after the Infosys Technologies (Shanghai) Company was set up, the venture center has 200 employees and 4 multinational customers.

Infosys, the Bangalore-based software services company, and other top Indian outsourcing rivals, including Tata Consultancy Services and Wipro Technologies, are doing application development and maintenance work in China as they grow rapidly to keep up with booming demand from the West for their services.

And they are quickly concluding that only China has a worker base equal to India's in terms of cost, quality and scale. Expansion there also offers the ability to cater to - and possibly garner more of - the local and regional markets, including Japan.

Vigorous global demand - revenue from India's information technology exports was $12.5 billion in the year ended in March, up 30 percent from the previous year - has resulted in a 10 percent to 15 percent annual rise in wages in India's software and back-office services industry.

According to a KPMG study for the National Association of Software and Services Companies, or Nasscom, an industry trade group in India, the country will face an acute shortage of technical employees by 2009, falling short by about 250,000 workers.

'We need a deep reservoir of talent as well as an alternative low-cost center like India as we continue to grow,' said Nandan Nilekani, chief executive of Infosys, who has talked of his company's scaling up to become the Wal-Mart of outsourcing. 'And only China can match up.'

In the quarter ended in September, Infosys alone added more than 5,000 employees, for a total of nearly 33,000. And Wipro added 5,500 employees, reaching more than 36,000.

As Indian companies have looked for skilled workers outside the country for software development and customer support centers, some have ventured into Mexico and Eastern Europe. But many say that China holds the most promise, in part because of its potential as a rival.

Though its software export revenues were just $700 million in 2003, 'China will soon be competing with India as an outsourcing destination,' said the Singapore-based Girija Pande, director for Asia Pacific of Tata Consultancy, India's top software services exporter. It set up operations in China in 2002.

And a presence now, these companies say, positions them to grab such future business. Entry into the country is made easier by the ability to piggyback onto the existing base of customers with interests in China. 'With China's economy swelling so quickly, multinationals are looking for global software firms who already understand their standards and systems,' Mr. Pande said.

Tata Consultancy, for instance, is working in China with its longtime customer, General Electric.

la: "I think that China will not challenge us..."

Speaking of China, is it really safe to be relying on them? As I understand it, they own 2 trillion of our debt. Now I'm no economist, but if they dumped all 2 trillion of those T-bills onto the market tomorrow, what happens? Are we sure they wouldn't do that just to be malicious?

Josh, they wouldn't do it just to be malicious, since the dislocations that would arise would harm them, too.

the reason the chinese keep buying our debt is because they regard it as an export subsidy.

the question is, when will they decide to bring down the cost of this subsidy, which would translate into two inter-related possibilties. They might diversify their holdings a little further, and they might simply conduct a buyer's strike until they see a higher rate of return.

Some of us have been expecting that higher rate of return to show up sooner or later, and that's why some of us are quite pessimistic about our economic prospects under bushism....

PS. Which is not to say that the Chinese don't now have a nice strategic advantage over us by owning as much of our debt as they do....

China is a rapidly developing economy of 1.4 billion people. The transformation to a developed, increasingly middle class economy, would be a stunning achievement, and drive development in country after country. As far as I can see there is a soundness to Chinese economic policy, and ample promise of social liberalization to accompany the development.

The Chinese would be able to buy quite a few senators, and congress persons, as well as good farm land and mines.

kharris wrote:

"That would make this year's change just incremental, rather than radical."

Hell, it could make it negative. We're in the realm of the unmeasured here, so we don't have hard facts to play with.

Howard wrote:

"Josh, they wouldn't do it just to be malicious, since the dislocations that would arise would harm them, too."

If countries never undertook what would harm their neighbors just because it would also harm them, there would be few wars, at least in modern times.

Anne wrote:

"and ample promise of social liberalization to accompany the development."

There may be promises, but action lately is going the other way. India has it right - first the liberalisation, then the development.

Martin Bento

Liberalization and development is to be preferred to development and hopefully liberalization. I do agree, but I am hopeful.

Of course productivity continues to climb. That's because workers (including me) are working 50-60 hour weeks so that they don't get layed off. I work in IT and workers in my area have to continue to show NEW value to hang on to their jobs. In the last five years, I've seen entire campuses in Silicon Valley dismantled and the work either sent to cheaper USA red states (CO, TX and AZ) or to India and China. Before long these multinational corporations are going to outsource themselves out of a customer base because everyone here will be unemployed.

Or maybe they're hoping that as jobs disappear and unemployment grows, that Americans will start accepting lower-paying jobs until the going wage here is equal to India and we are again competitive.

gene, i think that's the whole point.

Howard,

Is there any reason why the Chinese, and others buying dollars, wouldn't just decide one day that it would make more sense to subsidize exports to Europe instead?

Michael Carrol,

I see the upswing in payroll as a function of falling real wages, which increases the demand for labor. This explains why over half of the new jobs created in the last couple of years have been taken by immigrants, both legal and illegal. They are the one group in America not used to, and therefore not demanding of, the high wages of the past.

Ranjit, i don't want to claim to be a currency expert, but yes, that was the point i was trying to make in the phrase "diversify their holdings."

Martin, droll reminder that nations don't always act on their self-interest, but i still don't think, in this case, that the chinese would want to create a market panic....

A link from Michael Carrol suggests that protectionism will become the norm:

" reform agendas around the world -- from Asia to Europe -- are focused on dismantling structural rigidities in labor and product markets and thereby unshackling domestic demand. To the extent these actions are successful, private non-US saving will come down -- leaving less of a surplus to recycle into dollars . . ."

"there is a growing risk that the pendulum of free trade could swing in an increasingly protectionist direction, with Asia likely to bear the brunt of the pressure."

And China chairs the G20 next year. The G8 will be especially busy.

When we first started seeing better productivity data in the 1990s I decided to test the productivity data against real per capita income growth. Since productivity is the dominate factor explaining standards of living better productivity should show up in better real per capita income.

In the 1990s the better productivity data was confirmed by a surge in real standards of living.
But over the last 3-4 years the strong productivity data has not been reflected in rising real per capita income growth. Only in the last year has real income growh improved but it was zero in the first 2-3 years of the Bush administration while we had very strong productivity growth.

I have tried to come up with reasons why we had this very unusual divergence in productivity and standards of living growth in the early years of this cycle. But my answers have not been satisfactory. Do others have answers?

Spencer: average productivity per manhour (equals GDP divided by total number of manhours) is not the same as the marginal productivity of labor, which determines labor. The reason our stantard of living is not going up is that the marginal productivity of capital is going up instead, which explains why corporate profits are so high. This is a straight application of the factor price equalization theorem.

Productivity growth was robust through the Depression. All productivity growth tell us is how fast potential economic growth may be, but not what economic growth is going to be.

...'average productivity per manhour (equals GDP divided by total number of manhours..."

A question - how reliable is the official measure of total number of manhours worked?

I have a question concerning measured labor productivity. How accurate is the reported total number of manhours variabe used in calculating average labor productivity?

...I mean variable. Sorry.

Two more examples:
3 years ago: 12 system programmers and performance analysts support large IBM mainframe shop
Today: staff of 6 support a larger shop
Yippee! My productivity must have doubled (in spite of increased surfing time).

Friend's job:
3 years ago: staff of 3 researchers support resource center (i.e., library) of local office of major firm
Today: just my friend.
Holy cow! Her productivity has tripled.

"An economics post! Nice to see economics is making a comeback, Brad."

Yeah, imagine that! It's like spare ribs, though. Just not enough meat to make it worthwhile.

But speaking of productivity in the U.S. in the coming decade, the latest projections are out for productivity growth (well, per capita economic growth, but that's close enough) for the entire world, for the entire 21st century:

http://markbahner.typepad.com/random_thoughts/2004/10/3rd_thoughts_on.html

I like spencer's attitude of looking for these productivity gains in a rise in the standard of living (ok real per capita incomes) rather than just accepting/denigrating the numbers.
Spencer finds no real increases in per capita incomes for the first 3 yrs of Bush despite respectable productivity numbers. The fact that income growth really occurred in the top 1% is not going to explain it unless that wealth is not tallied as income (foreign income?). Pretty clear that any purported increased productivity came from cost cutting, esp labor, no? [ not the better mouse trap, esp not the computer controlled mouse trap]
My first instinct is to say "Aha! Always knew those numbers were way too high --look at Europe's", but I can see that Spencer wants me to accept the high Prod numbers and find the reason why per capita income has not budged.
Damn.