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Economic News, Data and Analysis

Missing the Point on Productivity

In the Associated Press story on the recent productivity growth numbers, Yahoo! News – U.S. Productivity Grows 5.1 Percent in 3Q, they include a paragraph on the relevance of productivity growth.
“Gains in productivity are a crucial ingredient to the economy’s long-term vitality. Healthy productivity increases allow the economy to grow faster without triggering inflation. Businesses are able to pay workers more without raising prices, which would eat up those wage gains. Strong productivity also helps lift companies’ profits.”
While all of this is likely true, it misses the main point about why labor productivity growth is important.
Simply put, the greater the rate of productivity growth, the higher our standards of living will be. By definition, higher productivity means more stuff produced (and hence consumed) with the same labor input.
In the long run, productivity growth is not just a “crucial ingredient,” it’s the whole shebang.
In addition, they have some of the logic backwards: we don’t want productivity so as to get low inflation and high profits, we want high productivity so we can consume more. Low inflation is important only because it may help productivity. Corporate profits are only good to the extent that they increase productivity.

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Filed under: Economics

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