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The Great Decoupling | U.S. productivity, GDP, employment, and income: 1953-2011

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I will soon be posting a podcast I did with Erik Brynjolfsson, director of MIT’s Center for Digital Business at the Sloan School of Management and co-author, along with Andrew McAfee, of Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy.

The above chart comes from McAfee’s blog. Here is what it means:

What’s going on? Why have the things that workers care about – jobs and wages – become decoupled from the the other things that  economy-watchers care about? So far, explanations for this unhappy phenomenon include tax and policy changes, and the effects of globalization and offshoring. These are clearly powerful forces, but there’s one other one: technological progress.

I’ve been talking a lot about this latter force here and elsewhere, and it’s the subject of Race Against the Machine, a short e-book Erik Brynjolfsson and I wrote that came out a bit more than a year ago (we’re working on a full-length sequel now).

Our argument, in brief, is that digital technologies have been able to do routine work for a while now. This allows them to substitute for less-skilled and -educated workers, and puts a lot of downward pressure on the median wage. As computers and robots get more and more powerful while simultaneously getting cheaper and more widespread this phenomenon spreads, to the point where economically rational employers prefer buying more technology over hiring more workers. In other words, they prefer capital over labor. This preference affects both wages and job volumes. And the situation will only accelerate as robots and computers learn to do more and more, and to take over jobs that we currently think of not as ‘routine,’ but as requiring a lot of skill and/or education. …

The national discourse needs to acknowledge the Great Decoupling, and also acknowledge that it’s not going to be reversed by a couple quick policy fixes or even, I believe, by deeper changes to our educational and entrepreneurial systems. I believe it’s a simple fact of the technological era we’ve been creating.

I want us to continue this work of creation — as I’ve said before, unplugging the computers would be about as bad an idea as ripping up all the roads and closing all the schools — but as we do so we need to rise to the grand challenge of dealing effectively with the Great Decoupling.

Now I have some issues with the median income numbers. I also think the last decade reflects, to some degree, mean reversion after the 1990s. But I think the general point of the Great Decoupling is likely correct and should be a main focus on U.S. public policy. It will certainly be a main focus on this blog in 2013.

10 thoughts on “The Great Decoupling | U.S. productivity, GDP, employment, and income: 1953-2011

  1. Call me skeptical. Machines have been replacing human labor since the beginning of the industrial revolution. Often in large numbers than what we see today. How many laborers with shovels does one bulldozer replace?

    Sure, new inventions and technologies displace workers, but this has been the trend for over a century and the private sector has created new products and jobs to keep pace.

    What McAffee’s charts don’t show are troubling trends in government spending, education and the growing welfare state.

    The latest GDP numbers show how government spending and borrowing can compensate for stagnant private sector activity. An government-made GDP number does not indicate a healthy economy.

  2. …to the point where economically rational employers prefer buying more technology over hiring more workers.

    This statement would be correct if only it had the right preface. Something along the lines of

    As government regulations incessantly drive up the cost of hiring workers, we eventually get….

    Just to pick one example, I am not aware of there being any requirement to pay any ObamaCare costs for a computer or a robot.

  3. Persistent high unemployment is in fact a secular turn as well as a cyclical one. And as much as AEI would like cure it with supply strategies, the answer lies in increasing demand through investment in human capital. The job creators who sell things for a living should be alarmed by the fever line in the chart above tracking stagnant median household income.

    You have to read to the end of this story to truly appreciate the life and ultimate fate of an Amazon warehouse worker. http://money.cnn.com/2012/07/23/technology/amazon-career-choice-program/index.htm

    Bear in mind that Amazon has already made retail clerks, cashiers and stockers redundant by the tens of thousands. The unskilled laborer soon will have no where to go.

  4. Besides displacing people, technology tends to widen the productivity differential between the highly skilled and the less skilled. Take this simplified example:

    Tom and Bob work in a pre-tech office using paper and pencil and telephone to do their work. Because Tom is much brighter and has more math skills than Bob, he can accomplish twice as much as Bob can. Now the boss buys computers for the office. Bob’s productivity doubles! But Tom has the ability to REALLY take advantage of computing power, and his productivity triples. Now Tom is doing three times as much as Bob. Tom’s value has increased disproportionately because of the addition of technology.

  5. Where is all the money going? Into the maw of the vote-buying machine. Government spending (fed, state, local) was 3% of GDP in 1900, about 24% in 1950, and now is 40% of GDP. Regulations have mushroomed. Currently, the total cost of government consumes well over half the GDP. “The rich” are not stifling the rest of us, nor is productivity. Big government is. We are not simply slowing economic growth, we are headed squarely at national bankruptcy.

  6. McAfee did not adjust for changing household size through time and he mixed reals with nominals, real gdp with nominal HH income. He also did not account for non-cash compensation (benefits) nor did he look at government social benefits to persons both of which have grown faster than has cash compensation. Nor does he adequately explain why he doesn’t include government employees in total employment growth. If he had done that he would find the recession caused the more recent decoupling there. The only decoupling I see is a decoupling of the data from sound analysis.

  7. Another factor, it seems to me, is that government has been consistently making it more expensive to employ people, so that the cost goes up for the employer but is not reflected in wages. OSHA, ADA, Affirmative Action, Family Leave, etc., lawsuits for not hiring the right person, lawsuits for firing the wrong person, lawsuits over everything. The list of added costs is huge, but rarely tallied. This added cost makes replacing people with machines an attractive option.

  8. I work in technology where wages are decent but they have been stagnant for the last ten years. IMO, we need to create more high paying jobs in order to experience a true expansion of the economy. What the chart above indicates to me is that technology is enabling workers to do more with less. The person above who said that the bright person would take advantage of technology more so than his dimwitted colleague, thereby resulting in his tripling his output, got it wrong. Technology equalizes the two of them which brings the dimwit up to the same level as the smart guy. If you are their employer you might reason that it is easier to under-pay a dimwit.

    Which brings me to the crux of the issue. As long as employers seek to make more money by forcing labor costs down thru union busting, offshoring, H-1 B’s and so on the gap in the graph is only going to get bigger. Ultimately it will ruin us all except for a select few, who will continue to demand tax cuts for themselves.

    The true job creators are not on Wall Street but on Main Street. Rich people will invest regardless of the tax rate as long as there is a chance to make profit. Demand is what creates jobs and opportunity and that comes from the rank and file having disposable income.

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