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
Leave a comment if you have any questions—I read them all!

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By | 2014-09-18T09:48:14+00:00 August 14th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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