Productivity improvement necessary for growth

PAUL KRUGMAN, Nobel Prize-winning United States economist, summarises the power of productivity, when he wrote: “Productivity isn’t everything, but in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker. World War II veterans came home to an economy that doubled its productivity over the next 25 years. As a result, they found themselves achieving living standards their parents had never imagined. Vietnam Veterans came home to an economy that raised its productivity less than 10 per cent in 15 years. As a result, they found themselves living no better – and in many cases, worse – than their parents”.

In a similar vein, the Australian Bureau of Statistics notes that: “key to long-term improvements in Australia’s living standards is productivity growth and, therefore, enhancing national productivity is one of the basic goals of economic policy.”

Paul Krugman’s statement contains three points that should be expanded. First, from 19451970, growth in US labour productivity was averaging 2.7 per cent annually, resulting in a doubling of labour productivity level in 25 years (about one generation).

In other words, World War II veterans were twice as well off as their parents. Second, Vietnam veterans returned to a US economy where labour productivity had slowed down significantly, averaging only 0.67 per cent, annually.

At this growth rate it would take 104 years (about four generations) for labour productivity level to double. In reality, the standard of living of Vietnam vets was substantially below that of their parents and even their grandparents.

Third, the bottom line is that in the long run, rising labour productivity levels results in the intergenerational transfer of prosperity. Falling, or negative labour productivity, equates to intergenerational transfer of poverty.

LABOUR PRODUCTIVITY GROWTH

Examining the long-run labour-productivity performance of the Jamaican economy, the data reveals that from 19511975, labour productivity growth averaged an impressive 5.3 per cent annually. At this growth rate, it would take 13 years (about half a generation) for the average Jamaican worker to be twice as prosperous as his or her parents. In contrast, for the next 42 years (1976-2017), average labour-productivity growth was negative (-0.61 per cent annually). This means that the present generation will never be as prosperous as the preceding generation.

Productivity improvement becomes a necessary condition for competitiveness, employment, economic growth, and prosperity. To achieve improved productivity, there are a few key stakeholders that must play their part. These include captains of industry and those responsible for allocating resources and making policy. The end game is that the current generation should understand that it is not a good idea to transfer poverty to our children.