Productivity - Missing or Hiding?

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.

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