Transcript How Labor Force Changes Affect Productivity Growth

Economic Growth
and Productivity
Chapter 16
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
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7.
8.
After this chapter, you should be able to:
Summarize the causes of economic growth in the United States.
Examine and explain the role played by productivity.
List and explain the reasons why our productivity growth has varied
in recent decades.
Assess the roles of savings, capital, and technology.
List and examine the factors slowing our economic growth.
Discuss and analyze economic growth in the less developed
countries.
Judge the Malthusian theory of population.
Analyze Baumol’s disease.
16-2
The Industrial Revolution and American
Economic Development

Prior to the Industrial Revolution:
Old age began around your 40th birthday.
• You lived and died within a few miles of where you were born.
• You spent most of your time farming.
• You were illiterate.
•
16-3
The Industrial Revolution and American
Economic Development
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The Industrial Revolution made possible sustained economic
growth and rising living standards for the first time in history.
•
Began in England around the mid 18th century
• Entered its 2nd phase in America in the early years of the 20th
century, based the mass production of cars, electrical machinery,
steel, oil, and chemicals
• 3rd phase in U.S., Japan, Western Europe, and newly industrialized
countries, based on consumer electronics, computers,
communications, advances in manufacturing
• 4th phase since 1990s, based on information age
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Economic Growth During the Last
Millennium
16-5
Annual Percentage Change in Productivity
and Real GDP, 1970-2009
16-6
Annual Productivity Percentage Increase
by Decade, 1950-2009
16-7
How Saving and Investment Affect Productivity
Growth
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Low savings rate  low productivity growth
Personal savings is low; personal debt is high
Government savings (budget deficits) are growing
U.S. Gross
Savings Rate
as a % of GDP
16-8
How Saving and Investment Affect
Productivity Growth
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Low rate of investment  low productivity growth
Capital spending (to replace capital stock) is low
Investment also  GDP growth (see PPC curves)
Country B has a
higher growth rate
than Country A.
Is Country B China
and Country A the
US?
16-9
U.S. Gross Savings Rate as a Percentage of
GDP: 1960-2009
16-10
How Labor Force Changes Affect
Productivity Growth
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In 1870, Americans, Germans, French, Japanese, and British
workers averaged nearly 3,000 hours a year on the job.
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Now it is less than 2,000 hours, with much of the decline having
come since World War II.
How does our labor force stack up against the rest of the world?
16-11
Average Number of Hours per Employed
Person in Selected Countries: 1990 and 2008
16-12
The Labor Force: Rising Quantity and
Declining Quality
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Americans are among the world’s hardest working people
(in annual hours).
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Much less vacation time offered (and taken) than Europe.
16-13
The Labor Force: Rising Quantity and
Declining Quality
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Our schools are failing: literacy and quantitative reasoning
skills.
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Businesses have trouble finding secretaries who can spell and put
together grammatically correct sentences.
Law firms spend millions of dollars teaching their attorneys how to
write.
Fast-food restaurant chains have found it necessary to place
pictures on their cash registers because so many of their clerks are
numerically challenged.
Though more Americans are graduating high school and college,
we have lower standards.
On a positive note, U.S. does well in indicators such as Nobel prize
recipients.
16-14
The Permanent Underclass:
Poverty, Drugs, and Crime
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The U.S. has a permanent underclass constituting about 10% of
our population.
•
These people are supported by tax dollars, and many are members of
third- and-fourth-generation welfare families.
• No other industrialized nation in the world has such a large dependent
population.
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Poverty is closely associated with drugs and crime.
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Drugs and crime take a toll on the economy.
16-15
Restrictions on Immigration
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This country was built by immigrants.
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Before the 1920s,virtually anyone who wanted to come to the
U.S. could.
In the early years of the 20th century, close to a million people came
here each year.
• Restrictive immigration laws were passed to prevent further dilution
of our so-called “vaunted northern European stock.”
•
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Today, even more restrictions since 9/11/2001.
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So where do we get our skilled labor?
16-16
The Role of Technological Change

Economic growth is largely determined by the rate of
technological change.
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Technological change enables us to produce more output from
the same package of resources, or, alternatively to produce the
same output with fewer resources.
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Information technology has boosted productivity (e.g. computer
literacy).
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The Role of Technological Change
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From 1973-1995, annual productivity growth was about 1.5%, and
it has since doubled.
How much of this increase was due to computerization and
computer literacy?
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2/3rds, according to economists Stephen Oliner and Daniel Sichel.
• E.g. FedEx, Walmart, airlines, banks use information technology to
boost productivity.
• Bar codes track inventory, saving customers, retailers, and
manufacturers $40 billion a year.
• B2B commerce on the Internet; Internet sales growing at double-digit
percentage rates.
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Pressure to adopt productivity-enhancing technology is
accentuated in a globalized economy.
16-18
Our Inefficient Transportation System
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From early U.S. history to the 1900s, ours was the world’s best.
After WWII, suburbanization; growth of national highway system;
reliance on automobile.
We let our railways deteriorate.
We have become dependent on imported oil, highway building and
maintenance, and parking lots.
As a result, we need to devote more percentage of our GDP to
transportation than our global competitors.
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Our Bloated Health Care System
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Rising health care costs; we lead the world in administrative costs.
In 1950, we spent less than $500 in today’s dollars on the average
person’s medical care, compared to $7000 today.
Since 2000, health care costs rising > 4x the rate of inflation.
We have fewer doctors per capita than other rich countries.
We spend about 2x as much per capita than other rich countries.
Yet more than 49 million Americans have no medical insurance.
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Health Care Spending as a Percentage of
GDP, Top Ten Countries, 2008
16-21
The Shift to a Service Economy
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Through the 1970s and 1980s, most of our productivity growth
was in the manufacturing sector.
“Baumol’s disease”: phenomenon named after NYU Professor
William Baumol:
Any service is inherently labor intensive.
Because productivity growth in the labor-intensive service sector
tends to lag behind manufacturing productivity growth, costs in
service-related businesses end up increasing over time.
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Health care is very labor intensive.
This puts a tremendous burden on taxpayers.
Again, the shock of the baby boomers health care needs may
drag down productivity gains in the coming decades.
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Additional Factors Affecting Our
Rate of Growth
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Since the 1970s, various other factors retarding our rate of
economic growth came into play.
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Higher energy and transportation costs
Environmental protection requirements
Health and safety regulations
Rising health care costs
The effects of 9/11
The effect of military spending
The influence of special interest groups, e.g. labor unions, corporate
PACS, trade associations
16-23
Questions for Further Thought and
Discussion
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Does global warming affect our productivity and our economic
growth?
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What can we do about it?
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Cap and trade
• Carbon tax
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Summary: Factors Affecting Our
Productivity
1.
2.
3.
4.
5.
6.
7.
8.
9.
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12.
Our low savings rate
Our low rate of investment
The rising quantity of labor
The declining quality of labor
The growth of the permanent underclass and its attendant
problems of poverty, drugs, and crime
Restrictions on immigration
Computerization
Military and other security spending
Globalization
Our inefficient transportation system
Our bloated health care system
Global warming
16-25
Output per Employee:
An International Comparison,
or Value Added per Person Employed, 2008
16-26
Economic Growth in the
Less Developed Countries

The world can be divided into 3 groups of countries:
1.
2.
3.
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The industrialized nations
The newly industrializing countries (NICs)
The less-developed countries (LDCs)

Those who live in the LDCs are the people who really have
problems.
Today, more than 2/3rds of people in the world live in LDCs.
•
About half live at or near the subsistence level.
• Most live in abject poverty, with no hope that they or their children
will have better lives.
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The Poorest Countries in the World
16-28
Economic Growth in the
Less Developed Countries
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The big question is how to get from LDC to NIC and, ultimately
to industrialized.
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The only way to industrialize is to build up capital in the form of
new plant and equipment.
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There are two main ways of doing this:
1.
2.
Working more and consuming less
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Since the poor nations are barely at subsistence level it’s pretty
hard for them to consume less
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Because there is often a great deal of unemployment in
preponderantly agriculture economies, those who want to work
more have a hard time finding work
Grants and loans from industrialized nations
16-29
The Malthusian Theory of Population
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“Dismal scientist” Thomas Robert
Malthus (1798)
Population tended to grow geometrically
(1, 2, 4, 8, 16, 32) while food supply
grew arithmetically (1, 2, 3, 4, 5, 6).
Could be widespread famine, unless
population increases are checked by
war, pestilence, famine or moral
restraint
LDCs can be caught in a bind: need
high birth rates for a labor force and
labor-intensive growth, but….
LDCs must plan their spending
carefully.
16-30
The Malthusian Theory of Population
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Was Malthus right? Not in the industrialized countries.
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Two things happened to ward off Malthus’s dire predictions:
1.
Because of tremendous technological advances in agriculture,
farmers were able to feed many more people.
2.
As industrialization spread, more and more people left the
country for the cities.

Birth rates fell.
16-31
Current Issue:
Health Care Costs in the Coming Decade
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Does the U.S. have the greatest health care system in the
world?
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American life expectancy is below average.
Childhood immunization rates are below average.
Infant mortality rates are higher than in 80% of other countries.
We have fewer doctors per capita and have fewer doctor visits
per year.
• We are admitted to the hospital less frequently.
• Two-thirds of adults are overweight; one third are obese.

Which of this is “good” news?
16-32
Current Issue:
Health Care Costs in the Coming Decade
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More bad news begins when the baby boom generation enters
retirement.
Our health care bill then will really go through the roof.
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The Medicare trust fund may be in serious trouble.
A continued inefficient health care system and escalating cost will
be a tremendous drag on productivity growth and consequently
our economic growth.
America’s standard of living will continue on a decline unless this
system malfunction is fixed very soon!
… and our economic growth will continue to lag.
Possible solution: a single payer system?
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