Blogwatch: September 2024

Productivity vs. wages, the number of firms, the basis of degrowth, and the importance of organisations

Productivity versus wages

At the Conversable Economist blog Timothy Taylor makes an obvious but important point in saying that the answer to the question as to whether worker pay has kept up with productivity depends on two measurement issues:

1. how you measure worker pay; and

2. how you measure productivity growth.

Taylor writes that these problems are examined in a new paper by Scott Winship from the American Enterprise Institute.

If you compare net total economic productivity — which refers to the entire economy, with the net meaning that depreciation of capital has been subtracted out — with nonsupervisory compensation then worker pay has not kept up with productivity, at least for the US.

Taylor notes that the

category of “nonsupervisory” workers … leaves out about 20% of private sector employees, as well as excluding government and a growing share of self-employed workers. Thus, comparing this group to “total economic productivity” might mislead.

But if you change how the variables are defined just a little then the result changes a lot. Let productivity now refer to the nonfarm business sector, meaning that government, nonprofits, and agriculture are left out, and count all paid employees in the nonfarm sector — this leaves out the self-employed. Now productivity and pay line up closely. So, what you measure matters.

Ruataniwha Conservation Park, Canterbury. Dave Heatley

A basic lesson in all of this: what may seem to be small differences in what is meant by the concepts used in productivity/wages comparisons matters for the overall result.

Talyor goes on to write:

Winship argues that if one compares apples-to-apples, “Over 75 or 100 years, aggregate worker pay has closely tracked increases in productivity. Pay differences across industries, across firms within industries, and within firms all seem to correspond with productivity differences.”

Are more firms better?

At the EconLog blog, Kevin Corcoran argues that More Firms Doesn't (Necessarily) Mean Better Competition. He gives two examples where he claims it may not. First, banking:

Prior to the Great Depression, Canada had a largely unregulated banking system. From that system, what emerged was a relatively small number of very large banks that operated across the country. In the United States, there was a highly regulated banking system that (among other things) heavily skewed towards a “unit banking” system rather than a branch banking system. That is, banks were geographically limited in how far they could expand (operating across state lines was often a no-go) and were thus limited in size. From this system, what emerged was a system of tens of thousands of fairly small banks across the country.

From a “more firms = more competition = better” perspective, it might seem like the United States, with its vast number of banks, would be in a better situation than Canada, which was “dominated” by just a few very large banks. But in practice, the opposite was true. Because banks were so numerous and small, it also meant each individual bank was highly undiversified in the assets it held and was all but chained to local economic conditions. Large, highly diversified banks can better absorb economic shocks than small, undiversified banks. This is part of the reason why in the Great Depression the highly regulated United States banking system had over 10,000 bank failures and the lightly regulated Canadian banking system had none at all.

But I’m tempted to ask if this is really a competition thing rather than a bad regulation thing. The fundamental problem was bad banking regulation in the US. The numerous banks observed was a result of the regulatory scheme in place in the US at the time. To see the effects of the number of firms and competition you would need to compare places with similar sets of banking regulations.

Corcoran’s second example is mobile operating systems. There is, at times, much hand wringing over the fact that mobile operating systems are effectively a duopoly of Android and iOS. Would it not be better if there were a greater number of operating systems available? However,

The more operating systems are out there on the market, the more complicated and expensive it is to make your application or program available to everyone on the market.

The transaction costs of app development for many different operating systems may well be too high to make it worthwhile. Fewer operating systems makes it cheaper and easier for app developers, so more apps compete directly with their competitors for consumer downloads than if developers with similar products targeted different platforms. However, competition between operating systems to host the most desirable apps is muted, as nearly all of these are now available on both platforms.

To degrowth or not to degrowth, that is the question

At VoxEU.org Ivan Savin and Jeroen van den Bergh argue there is, No solid scientific basis for degrowth.

In the last decade, many publications have appeared on degrowth as a strategy to confront environmental and social problems. This column reviews their content, data, and methods. The authors conclude that a large majority of the studies are opinions rather than analysis, few studies use quantitative or qualitative data, and even fewer use formal modelling; the first and second type tend to include small samples or focus on non-representative cases; most studies offer ad hoc and subjective policy advice, lacking policy evaluation and integration with insights from the literature on environmental/climate policies; and of the few studies on public support, a majority and the most solid ones conclude that degrowth strategies and policies are socially and politically infeasible.

Noah Smith, at Noahpinion, writes “but if degrowth as an academic theory is destined for the compost pile of history, degrowth as actual practice is far too common.” He uses Britain as a real-world example of implementing degrowth policies.

The result of all these British policies is real, actual degrowth — not the neo-pastoralist fantasies of faux-environmentalist postdocs, but concrete policies designed to placate the citizenry by preserving the built environment of the recent past. Real degrowth isn’t a yearning for the 1700s, but for the 1970s. Change is scary, and ensuring people that the government will prevent change is what I call a “stasis subsidy” — a promise that looks cheap in the present because it incurs no fiscal costs, but creates huge economic costs down the road. The UK is paying those costs now.

Neo-pastoralist fantasies of faux-environmentalist postdocs, indeed!

Organisations matter

Also at VoxEU.org, Ghazala Azmat, Florian Englmaier, Alfonso Gambardella, Maria Guadalupe, Raffaella Sadun and Catherine Thomas ponder The economics of organisational strategy. They argue that organisations play a central role in our economies, and many of today’s global problems can only be solved by organisations. Their contention is that

much more work is needed to fully understand how organisations behave and respond to economic incentives. For example, more recent work has started to unpack the black box of organisations, showing that they often don’t work very well. There is large heterogeneity in performance across otherwise similar organisations, particularly among firms. This implies that scarce resources are being used inefficiently, and there is huge potential opportunity in understanding why inefficiency persists. It also raises the question of why effective ideas are not widely copied. For example, good managerial practices can significantly impact firm performance, but there is vast disparity in their adoption. And the forces that create persistent performance differentials may also cause organisations to respond to policy initiatives differently from what would be predicted in a frictionless firm¹

One wonders if we would be further along this path if we had taken more notice of the work of people like Arnold Plant back in the 1930s, or Harald Malmgren in the early 1960s.

By Paul Walker

[Editor’s note. This is the final regular edition of Blogwatch from Paul. It is more than 13 years since he penned the first edition in August 2011. The NZAE, and in particular the editors of Asymmetric Information past and current, would like to thank Paul for his unstinting efforts and fascinating contributions. We wish him the best in his well-earned retirement.]

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Goblin forest, Tararua Forest Park. Dave Heatley

1. References removed from quoted text.