Dazed and Confused


Robinson Crusoe

lives alone on a desert island. He's in the coconut-picking business. And nuts represent both his output and his income.

Rob was a fat sack when he first hit the island. Took him eight hours just to collect one nut. But now, a year later, he's fit. Four-nut, eight-hour workdays are the norm.

So Rob's productivity shot up 300% -- from 0.125 coconuts per hour to 0.5 coconuts per hour.

And Rob's income also shot up 300% -- from 0.125 coconuts per hour to 0.5 coconuts per hour.

Save it with the real-world criticism; your narrator knows full well that no Frenchman would put in an eight-hour day. And anyway, as silly and as simple as it is, the Crusoe example illustrates this important economic relationship: Productivity and real hourly wages ought to move together over long periods of time.

Productivity rose an average 2.7% per annum during the 1950s, an average 2.9% during the 1960s, an average 1.9% during the 1970s, and an average 1.1% during the 1980s. The table below shows what real (inflation-adjusted) earnings did over that time.

Decent match-ups, those. Both productivity and real earnings rose a lot during the 1950s and 1960s; both show progressive deterioration into the 1970s and through the 1980s.

Which brings us to the 1990s. Glance back at the table above. Looking at the average 0.2% increase that real earnings turned in between 1990 and 1998, what would you guess productivity did over that period?

Government statisticians put the

number at 1.3%. Policymakers and most of the economics profession, however, reckon the number is actually much higher than that. Indeed, it's generally accepted that productivity is now rising as quickly as it was during the 1950s and the 1960s -- that it's booming at a rate upwards of 3.0%.

It's stupid to argue that productivity isn't rising faster now than it was during the 1980s. It is. Why?

Fed Governor Meyer

sums it up nicely: "Because of a return on years of corporate restructuring and the increase in capital per worker associated with the current investment boom, much of which is linked to technological change, specifically the information revolution." Who's batty enough to argue about that? No one. There exists evidence of it under any rock -- and nowadays, there even exist people who will bend over and flip the rock for you.

But here's the puzzle. If productivity is indeed rising as fast now as it was during the 1950s and 1960s, then why they hell are real earnings turning in such a relatively sorry performance? How to explain such a massive gap in the increases between the two periods? Why aren't real earnings rising as fast as they were 30 and 40 years ago?

Lots of people would point out that they do actually show sizable increases over the past couple of years -- and they're dead right.

Real earnings rose 2.2% in 1997 and 2.7% in 1998 (note that the ninth year of the 1990s decade equals 1998). All well and good -- those are exactly the kind of increases we'd expect with productivity running at 3.0%.

But note also that real earnings posted only one yearly decrease between 1950 and 1969. Why, during the current expansion, were they falling as recently as 1995? Why did they lag for so long (the investment boom began early in the decade and Asia didn't hit until the middle of 1997)? And why have earnings gotten off to such a lame start in 1999? They grew only an average 1.3% during January and February -- even with the benefit of some of the kindest inflation numbers ever. And say one-handles persist through the end of the year; will people take that to mean that productivity growth is decelerating?

Of course productivity is rising.

But maybe, just maybe, it isn't flat-out booming.

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