Thinking about ideas for blog posts, I started this one by making a list of life milestones and what the unemployment rate was during the month each one occurred. I came of age in the 1980’s, and the in the month of my first marriage, July 1985, the unemployment rate was 7.4%. When my first child was born the next year, it was in the high 6% range. Thinking back, I never had difficulty finding something to do back then, and I don’t recall having conversations with friends about difficulties finding employment for myself or anyone else.
The way I remember the latter half of the 80’s was there was stuff to do nearly everywhere and the ability to get money wasn’t a huge problem (it was a problem for my first husband for personal reasons, though). My generation was pretty optimistic about the future.
The curious thing about this is that the current unemployment rate appears low by the late 80’s standard. But I am not aware of anyone feeling optimistic. The unspoken fear of the pink slip is the specter that hangs out in the ambiance and I can’t quite put my finger on the reason.
I took a look at some statistics on FRED while musing about the difference in optimism between then and now, not really sure what I was looking for, but pretty sure I’d know if I stumbled over it. One of the graphs I made had productivity (output per person) and the unemployment rate, and it shows a loose positive correlation between these two. After mulling it over, I realized that as the unemployment rate rises, the remaining employees make up for the people who were laid off, and productivity per person rises much of the time in a huge way. But it only lasts for a little while, and as the unemployment rate falls, productivity growth slows.
The only times productivity has risen largely as the unemployment rate was falling was in the late 1960’s and again 1990’s. I suppose that during the late 1990’s technological interconnection and collaboration actually made us more productive. But perhaps this way of working has diminishing returns because we’re now back in the historical pattern where more people sharing a workload produce a much smaller net gain, especially as the overachievers take it easy as more workers arrive to help.
Given that there’s talk about productivity growing slowly as if that has some bearing on monetary policy, and never having been completely convinced of a rational connection, I’ve been noodling it to see if I can figure it out. The productivity growth data has a logical connection to the unemployment rate, and it is currently behaving in much the same way as appears typical as far back as the data set goes, to 1948. So, if I had to guess, I would say productivity growth isn’t abnormal now. It was abnormal in the late 1990’s and to expect the same thing is now is unrealistic.
So what is actually being said during the discussions about the current state of productivity in the context of monetary policy is… It might be simpler than I imagined, perhaps that because of the current productivity trend, monetary stimulus won’t increase RGDP much, if at all; and because of the split of NGDP between growth and inflation, it would increase inflation.
If that is what is being said, I think it is looking at the supply side as flat, static, and zero sum; and in my view that’s just wrong. The only way it would be that way is under the belief that rabid investors gorging on piles of cash from the Fed’s “punch bowl” is the thing to be avoided, or that everything that’s ever going to be built is built. If growth and opportunity is what is desired this assumption would be a huge mistake because the gorging is what translates the stimulus into growth and keeps inflation down. It’s when there are no investments to be made, or no appetite for it is when inflation would be more of a problem – and the last time I checked, Hugo Chavez is in Venezuela, not here. None of us have stopped dreaming. Capitalism needs to be fed, and we’ll always find a productive use for it.