Too productive

Do productivity gains and unemployment go hand in hand?

Published August 31, 2006 9:42PM (EDT)

While browsing the World Bank Web site this morning, a headline caught my eye: "Rapid Growth in China, India Are Reducing Extreme Poverty, UN Labor Agency Says." That's odd, I thought, the International Labor Organization doesn't usually specialize in repeating World Bank talking points. As noted here before, the single most common justification given for expanding free trade are the hundreds of millions of people who have escaped extreme poverty in India and China as a result of the integration of those nations into the global economy. But the ILO's attention tends to focus on other matters.

I guess executive summaries are all in the eye of the beholder. Here, for example, is the lead sentence of a Shanghai Daily article on the same ILO report referenced by the World Bank, "Eye-popping economic growth and productivity gains in East Asia haven't led to adequate job creation, higher wages or improved working conditions in the region, the International Labor Organization said in a report yesterday."

Well then! Maybe it's time to look at the actual report: "Labor and Social Trends in Asia and the Pacific 2006: Progress towards Decent Work. And upon further review, while the report does give due notice to the tremendous gains made in Asia in the last couple of decades, it's clear that the Shanghai Daily does a better job of capturing its essential points than does the World Bank's synopsis.

There is a conundrum brewing in Asia, one that economists are also facing in the United States. Productivity growth -- the increase in gross domestic product produced per worker, or per worker-hour, has grown dramatically, particularly in China, where labor productivity grew an astounding 150 percent between 1990 and 2004. But worker wages and employment aren't keeping pace. In fact, in most of Asia, including China, unemployment is rising, even in the face of labor productivity gains.

This isn't how it is supposed to work. In the long run, gains in productivity are supposed to boost overall demand in an economy, leading eventually to higher wages, and ideally, greater employment. But as the ILO report notes, "labor-saving technological change often allows firms to produce the same or greater output with less labor input, and in the short-run job losses due to productivity growth can occur."

The question is, how short is the short run? Because as liberal economists who seemingly never tire of quoting the great John Maynard Keynes like to repeat: "In the long run we're all dead." The question is of paramount importance in China, where millions of workers laid off by failing state-run enterprises are pumping up unemployment numbers, even as the nation's inexorable climb up the technological ladder is reducing demand for unskilled labor.

The same scenario may be playing out in the U.S. Productivity gains have been steady, but wages are stagnant. Competition from India and China is often blamed, but improvements in technology may be equally at fault. The ILO report keeps coming back to a key recommendation. Policymakers need to think about how they can boost the availability of good jobs, and not just content themselves with rosy numbers for economic growth and productivity.

I wonder what the World Bank thinks of that.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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