National/Act agree to close the ‘income gap’ between Australia and NZ by 2025, requiring ‘3% productivity growth per year’. Which is just economic techno-babble. What ‘income gap’ are they talking about? GDP per capita or wages or what? And how would a faster rate of productivity growth close this gap? Anyone who knows what productivity is (the amount of wealth produced in a unit of work) knows that merely increasing productivity doesn’t necessarily boost GDP or wages. GDP = productivity x work done. So, GDP not only depends on productivity it also depends on how many people are in work. And boosting productivity doesn’t lead automatically to higher wages - wages are determined by supply and demand in the labour market, nothing to do with productivity. In fact, productivity grows faster when employment drops because it’s the low quality workers that lose their jobs first and lower quality capital that sits idle first, but wages don’t go up because there is more slack in the labour market.Fortunately for me over at The visible hand in economics they have taken Pierson to task pointing out his errors. You can see tvhe site for discussion of these issues.
But as to Pierson's claim that
Anyone who knows what productivity is (the amount of wealth produced in a unit of work) knows that merely increasing productivity doesn’t necessarily boost GDP or wages.I feel I can do no better than to quote, of all people, Paul Krugman
Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea's wages have also risen dramatically over time. ("Does Third World growth hurt First World Prosperity?" Harvard Business Review 72 n4, July-August 1994: 113-21.)Even Krugman gets it, so why not Pierson?
Let me add that I think tvhe is right when it says
National and Act are right that higher levels of productivity growth would directly help us close the income gap with Australia - a gap that DOES exist (although it may not even be an issue). However, saying that “we will increase productivity” is not useful - it is like saying “we will magically make trade-offs disappear”, as saying that productivity is higher is like saying that we can do more with less! National-Act will need to come out with clear policies about how they will “increase productivity” - then we can discuss those policies. For now it is only empty rhetoric. (Emphasis added)Putting out some serious policy would be a step in the right direction.