The textbook describes the productivity slowdown from 1974 to 1995 in which the

Question

The textbook describes the productivity slowdown from 1974 to 1995 in which the annual growth rate of real GDP per hour worked in the United States was 1 percentage point per year lower than during the 1950–1973 period. Although the reasons for this anemic growth are still not certain, the subsequent increase in productivity growth to an annual average rate of 1.9 percent from 1996 to 2012 was welcome news to economists. But others have pointed to a dark lining in this silver cloud. The economic expansion that began after the 2001 recession was frequently referred to as a “jobless recovery” in newspaper and magazine articles. Some observers argued that faster productivity growth allowed employers to increase production without increasing employment. Although employment growth subsequently increased, the concern expressed for workers’ jobs highlights two different views of productivity. In the Federal Reserve Bank of San Francisco’s Economic Letter, Carl Walsh wrote:

A. “If higher productivity allows firms to shed workers, how can it raise wages and living standards? If productivity does lead to improved wages and living standards, why do so many feel the recent productivity growth has left workers behind?”

Walsh notes that productivity growth and changes in technology cause structural changes that result in increased production and employment in some industries and reductions in production and employment in other industries. For example, the growth in demand for word processors and personal computers resulted in a decline in the demand for typewriters and some types of office workers. Small changes in overall employment mask what often are large increases in employment and unemployment in individual industries. In other words, the negative effect of productivity on employment occurs in the short run, while the positive effect of productivity on employment occurs in the long run.

Source: Carl E. Walsh, “The Productivity and Jobs Connection: The Long and the Short of It,” FRBSF Economic Letter, July 16, 2004

B. The average annual growth rate of real GDP per hour worked from 1950 to 1973 was 2.6 percent. Examine the fluctuations in the annual unemployment rate for this period in Figure 20.6 in the textbook. Is the behavior of the unemployment rate consistent with Carl Walsh’s explanation of the effect of productivity growth on employment?

Explanation / Answer

1. Higher productivity only allows firms to shred unskilled and unproductive workers. Infact, with high productivity, the demand for skilled workers increases. As a result, the wages of skilled workers increases and so does their standard of living.

2. Reference made to text book. Unable to find out the required figure.

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