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Business and Regulations,Healthcare,K-12 Education,Opinion

Productive Take on Economic Policy

Mar. 12th, 2012
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RALEIGH – Employment is certainly an indicator of an economy’s performance over time, as long as you are looking at overall rates of employment, unemployment, or underemployment. But never make the mistake of evaluating the health of a particular firm or industry by the number of jobs associated with it. Otherwise, you run the risk not just of missing the forest for the trees but of mistaking a sapling for a stump.

Consider the case of agriculture. During most of the history of human civilization, most workers have been engaged either in the production or processing of food and fiber. Until the 19th century, in fact, the share of employment devoted to agriculture and related pursuits was over 50 percent even in industrializing countries such as the United States.

Since the mid-19th century, however, the share of the workforce devoted to growing and processing food and fiber has plummeted, even as the availability of food and fiber has exploded. Indeed, the ratio of agricultural workers to the rest of the workforce has almost always served as a reliable indicator of economic progress – the lower the ratio, the higher the living standards of the state or nation in question.

The reason is that despite the furious claims of Luddites and neo-Luddites, increases in productivity are good things, not bad things. If new technologies, discoveries, or business forms allow firms to produce more stuff per worker per hour, consumers benefit. They get what they want at a lower real cost. That means they have more money to spend on other things – on luxury goods rather than necessities, or on services rather than goods – that need resources, labor, and capital to produce.

Obviously, in the short run increases in productivity can lead to job losses for particular firms or industries. If a new machine allows a plant that used to employ 1,000 to produce the same amount with half as many workers, and demand for the good doesn’t grow by a similar amount, hundreds of people may have to seek other work. These dislocation effects are very real.

But such changes are not only inevitable, they are preferable to the alternative of keeping production costs artificially high by failing to install the new machine. In the case of agriculture, keeping large numbers of farm laborers in the fields instead of using modern technologies and fertilizers to dramatically increase crop yields would have created far more hardship, and far less growth in living standards, than what actually happened.

For several decades now, we have been undergoing the same productivity transition in manufacturing. Not just in the United States but around the world, manufacturing has declined as a share of the workforce but not nearly as much as a share of economic output. As late as 1983, nearly 20 percent of American workers were employed at manufacturing firms. Today, manufacturing’s share of U.S. employment is about half that amount.

But U.S. manufacturing output remains strong. It accounted for about a fifth of all global manufacturing output in 1970 – and still accounts for about a fifth of global manufacturing today. The price of manufactured goods has declined in real terms over time, while the price of services has gone up. A major reason why is that it has proven easier to increase productivity in manufacturing than in services such as education and health care, for a variety of reasons (including the heavy government involvement in financing or delivering those services).

If you look at industry sectors merely as engines for job creation, you may see agriculture and manufacturing as sources of frustration. But if you look at them, more properly, as engines for value creation, you will see agriculture and manufacturing as sources of inspiration.

Over the coming years and decades, the real economic challenge will be how best to achieve significant increases in productivity in the service sector. If we can, North Carolina and the nation can look forward to a return to rising incomes and living standards. If we can’t, economic growth will remain tepid.

If only political debate about the economy was as productive as agriculture and manufacturing.

Hood is president of the John Locke Foundation.