Page 401 - The Principle of Economics

TIME PERIOD
1959–1997
1959–1973
1973–1997
GROWTH RATE
OF PRODUCTIVITY
1.8
2.9 1.1
GROWTH RATE
OF REAL WAGES
1.7
2.9 1.0
Table 18-2
PRODUCTIVITY AND WAGE GROWTH IN THE UNITED STATES
CHAPTER 18
THE MARKETS FOR THE FACTORS OF PRODUCTION 409
SOURCE: Economic Report of the President 1999, table B-49, p. 384. Growth in productivity is measured here as the annualized rate of change in output per hour in the nonfarm business sector. Growth in real wages is measured as the annualized change in compensation per hour in the nonfarm business sector divided by the implicit price deflator for that sector. These productivity data measure average productivity—the quantity of output divided by the quantity of labor—rather than marginal productivity, but average and marginal productivity are thought to move closely together.
Table 18-2 also shows that, beginning around 1973, growth in productivity slowed from 2.9 to 1.1 percent per year. This 1.8 percentage-point slowdown in productivity coincided with a slowdown in wage growth of 1.9 percentage points. Because of this productivity slowdown, workers in the 1980s and 1990s did not experience the same rapid growth in living standards that their parents enjoyed. A slowdown of 1.8 percentage points might not seem large, but accu- mulated over many years, even a small change in a growth rate is significant. If productivity and wages had grown at the same rate since 1973 as they did pre- viously, workers’ earnings would now be about 50 percent higher than they are.
The link between productivity and wages also sheds light on international experience. Table 18-3 presents some data on productivity growth and wage growth for a representative group of countries, ranked in order of their produc- tivity growth. Although these international data are far from precise, a close link between the two variables is apparent. In South Korea, Hong Kong, and Singa- pore, productivity has grown rapidly, and so have wages. In Mexico, Argentina, and Iran, productivity has fallen, and so have wages. The United States falls about in the middle of the distribution: By international standards, U.S. pro- ductivity growth and wage growth have been neither exceptionally bad nor ex- ceptionally good.
What causes productivity and wages to vary so much over time and across countries? A complete answer to this question requires an analysis of long-run economic growth, a topic beyond the scope of this chapter. We can, however, briefly note three key determinants of productivity:
N Physical capital: When workers work with a larger quantity of equipment and structures, they produce more.
N Human capital: When workers are more educated, they produce more.
N Technological knowledge: When workers have access to more sophisticated
technologies, they produce more.
Physical capital, human capital, and technological knowledge are the ulti- mate sources of most of the differences in productivity, wages, and standards of living.