Productivity and Unemployment

Does productivity growth lead to relatively higher unemployment? According to David Beckworth,

Boom and Bust Banking (Beckworth)Starting with Galí (1999),* there have been a number of studies that show positive productivity shocks lead to a  temporary decline in hours worked. The interpretation given to these findings is that given sticky prices, firms initially respond to productivity gains by using less labor. Only as prices become more flexible (i.e., the SRAS curve shifts right) do firms employ more labor and push the economy to its full economic potential. Thus, these studies imply that a productivity boom of the kind experienced during 2002–2004 should initially lead to some slack in resource utilization.

— David Beckworth, “Bungling Booms: How the Fed’s Mishandling of the Productivity Boom Helped Pave the Way for the Housing Boom,” in David Beckworth (ed.), Boom and Bust Banking (Oakland: The Independent Institute, 2012), pp. 38–39.

* (Jordi Galí, “Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?,” American Economic Review 83 [1999], pp. 402–15.)

I’ll have to read the literature, but suffice to say I’m not entirely convinced. The above excerpt is also in the context of negative outputs gaps caused by productivity shocks (a rightward shift in the LRAS curve, but only a gradual rightward shift in the SRAS curve), which I also don’t find convincing as a real world causal explanation of productivity growth. If an economy is in a full employment equilibrium, I don’t see why changes in technique, technology, et cetera, which allow the firm to expand production at the same costs would disrupt full employment, and I don’t see why sticky wages would be relevant. This being said, I can see why firms would initially reduce the amount of labor employed: positive productivity shock can change the marginal products of both labor and capital, making the latter initially more economical than the former (to the point of re-arranging the amount of labor and capital employed) — especially at first, when firms are building up the capacity to maximize production.

I wanted to corroborate this with data from the 1873–94 era, but unemployment figures fluctuated wildly due to various financial crises and mild output contractions. Also, if we hold “boom” logic, where unemployment is temporarily below its “natural” level, then using the era’s lowest figures might also be misleading. But, the average unemployment during those years was 4.7 (using unemployment figures from J.R.Vernon, “Unemployment Rates in Postbellum America: 1869–1899,” Journal of Macroeconomics 16, 4 (1994), pp. 701–714).

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