Productivity - Missing or Hiding?
In “U.S. Productivity: Missing or in Hiding? (July 17, 2015 WSJ), Microsoft’s chief
economist Preston McAfee hits the nail on the head when he speculates: “Maybe our
mysterious productivity gain is in the form of less inflation…”
Janet Yellen and most economists say that productivity is necessary for wage gains.
This is only true half the time. It is true when products and services sold fetch
higher prices because they are proprietary or commodities in short supply. Sales
rise at companies selling these and so do wages for their workers with whom profits
are shared, but real wages decline for the consumers of these products because to
them the higher prices are inflationary. If enough companies produce products and
services with prices that rise, then national productivity increases will be robust and
nominal wages will also likely rise as companies share the wealth, leading to higher
inflation. (Wages constitute 60% of the inflation gauge.)
The other side of the coin, which we are seeing today, is when products and services
sold are commodities that increase in volume and quality but fall in price or are
given away for free. For companies producing these, sales do not increase and wage
increases may be constrained, but real wages go up for those who consume the
“free” stuff. If enough companies in an economy produce commodity products and
services for free, then measured productivity gains (GDP/hours) will be muted
because hours worked will rise but no national income will be produced. The
productivity gains will be reflected instead in lower inflation and hence higher real
(not necessarily nominal) wages to consumers across the economy.
The other missing element in government methodologies for measuring
productivity is stock market values. If a company’s product or service is being given
away, then first-pass productivity is low because hours are being worked but no
revenue is being received. However, the stock prices of companies distributing
these free apps are often soaring because investors, unlike government accountants,
look into the future and see potential value down the road even though there is
none today. A more accurate measure of GDP and hence productivity would
therefore amortize stock price appreciation into annual GDP measurements for the
free products and services.