How Productivity And Globalization Affect The Economy

By Brent Radcliffe | November 04, 2011 AAA
How Productivity And Globalization Affect The Economy

Productivity powers growth: Farmers use combines instead of scythes to harvest grain, and manufacturers use automated assembly lines instead of lines of workers with hammers to produce cars. Being able to produce more for less is what separates the businesses that survive, and the economies that boom, from those that fall by the wayside.

TUTORIAL: Economic Indicators

For years, economists stuck to the belief that both employees and businesses would gain from improvements to productivity. If workers were able to produce more per hour worked, then businesses would want to hire more workers, pushing up wages. These workers would then buy cars and houses, pushing up demand for products and services, which would in turn make businesses want to hire more workers. Barring an economic shock or rampant inflation, this cycle of hiring and spending would allow an economy to grow at a fairly consistent rate.

GDP
According to the Organization for Economic Cooperation and Development (OECD), the United States had the fourth highest GDP per hour worked ($59.50 USD) in Oct. 2011, behind the Netherlands ($59.60), Norway ($75.40) and Luxembourg ($78.50). Research at the U.S. Bureau of Labor Statistics shows that between 2000 and 2010, real GDP per hour worked in the United States grew from $48.47 to $59.28, or 22.7%. Productivity was clearly on the rise, and at a fairly quick clip.

The OECD also indicates that between 2000 and 2010, average annual wages for full-time employment grew from $49,981 to $52,607, or 5%. They were basically stagnant, but how did this happen? (For a look at GDP and what investors look for, read Can Global Investors Profit From GDP Watching?)

The U.S. economy is really two economies mashed together. On one side are tradable industries: businesses such as manufacturers, financial services, mining and agriculture, that compete in the global market. On the other side are non-tradable industries: health care, construction, transportation, retail stores and other services, that really can't be imported from elsewhere. These industries typically have lower wages than tradable ones. Job growth over the past two decades has been skewed to the lower paying non-tradable sector, but wages in the tradable sector have actually increased, as more and more low and mid-level jobs are outsourced.

Globalization and Outsourcing
Let's set the plight of the middle class aside and focus on why national statistics aren't picking up on trends, such as globalization and outsourcing. One major problem is growth attribution. If a domestic manufacturer uses the goods it imports more efficiently and winds up needing to import less, this is treated the same by national statistics as that same domestic manufacturer finding a cheaper source of imports (e.g. using a Vietnamese supplier instead of a Chinese one). While in a pure dollar sense they are the same, they are very much different, when it comes to how they affect the economy as a whole. A domestic manufacturer boosting productivity could lead to higher wages and higher employment, because it earns more while spending less to produce a good, while the second scenario means that the manufacturer will potentially have higher profits with cheaper imports, but won't necessarily need to hire any new employees.

Why is measuring the effects of outsourcing so difficult? While there are a host of statistical resources at an economist's fingertips, there is no easy way to compare the price of a particular item imported from one country, to the same item imported from another, while at the same time listing the price of the item, if produced domestically. In addition, a growing number of businesses are multinationals, meaning that they are shifting their own goods from one country to another, in their own global supply chains. If you multiply this by thousands of items, the problem becomes even more complex. (See The Globalization Debate for additional reading.

The Bottom Line
Understanding the true value of supply chains would give policy makers better weapons for promoting economic growth, which would be much better than relying on value-add figures for manufacturing. It also would allow policy makers to identify problems in a timely fashion, rather than years, and many PhD-level papers, later. Moreover, economists would finally be able to tell the true value and impact of imports, for consumers and businesses, instead of making conjectures.

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