Productively Growing

Why does productivity matter?

The textbooks tell us that rising productivity is essential to rising real wages. That is, as workers do more, they can be paid more. But why? Won’t employers just pocket the extra earnings? That’s what seems to be happening now. Rising productivity following the Great Recession has led to rising profits and stagnant wages, soaring stocks and a lagging labor economy.

In the short run, yes, when firms can expand production using the same number of workers, they will, and their own profits go up. But that money has to go somewhere—either into increased capital spending, or increased dividends, or even investments, pushing interest rates down. It doesn’t just sit in Scrooge McDuck’s vault. It cycles through the economy, increasing demand for goods and services somewhere else.

As technology makes older industries more efficient, businesses arise to build the new gadgets. These start-ups usually lose money to begin with, and some don’t survive. That’s part of the reason small-cap stocks are more risky that large-caps. They can fake it ‘till they make it, but some don’t make it. Eventually, though, some firms do, and an entire new sector is born—with its own labor needs and wage structure. Cart wrights become automakers become drone engineers.

Economic thinking separates short-run and long-run effects. In the long-run, we all may be dead, but rising productivity means our kids and grandkids will be better off.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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By | 2014-09-18T09:48:14+00:00 August 14th, 2014|Global Market Update|0 Comments

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