Chapter 16
Economic Growth and Productivity
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-1
Chapter Objectives
• Economic growth in the United States: The
record
• The role of productivity
• The reasons our productivity has varied
• The roles of savings, capital, and technology
• The declining quality of our labor force
• Economic growth in the less developed
countries
• The Malthusian theory of population
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-2
The Industrial Revolution and
American Economic Development
• Prior to the Industrial Revolution
– Old age began around your 40th birthday
– You lived and died within a few miles of
where you were born
– You spent most of your time farming
– You were illiterate
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-3
The Industrial Revolution and
American Economic Development
• The industrial revolution made
possible sustained economic growth
and rising living standards for the first
time in history
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-4
The Industrial Revolution and
American Economic Development
• The Industrial Revolution began in
England around the middle of the 18th
century
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-5
The Industrial Revolution and
American Economic Development
• The Industrial Revolution entered its
second phase in America in the early
years of the 20th century
– It was based on the mass production of cars,
electrical machinery, steel, oil, and chemicals
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-6
The Industrial Revolution and
American Economic Development
• Since the 1980s, the third phase of the
Industrial Revolution has taken hold in Japan,
Western Europe, and the newly industrialized
countries of Southeast Asia as well as in the
United States
– This phase is based largely on consumer electronics,
computer systems, communications systems,
computer software, and advances in manufacturing
processes
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-7
The Industrial Revolution and
American Economic Development
• Since the 1990s, we have been in the
fourth phase of the Industrial Revolution,
the information age
– During this period nearly all business firms
and most homes in the world’s industrial
countries have computerized
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-8
Economic Growth During the Last Millennium
3,500
World GDP per person, 1000 = 100
3,000
2,500
2,000
1,500
1,000
500
1000
1200
1400
1600
1800
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
2000
0
16-9
The Record of Economic and
Productivity Growth
Percentage Change in Per Capita Real GDP, Selected Years
Period
Percentage change
1929-39
-6.1%
1939-49
35.8%
1949-59
23.2%
1959-69
30.1%
1969-79
18.6%
1979-89
17.4%
1989-99
12.2%
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-10
The Record of Economic and
Productivity Growth
Annual Rate of Productivity Growth, 1960-2000
6
4
2
0
22
1960
1964
1968
1972
1976
1980
1984
1988
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
1992
1996
2000
16-11
The Record of Economic and
Productivity Growth
There is no one clear reason why our rate of productivity increase slowed in
the 1970s and 1980s, but a reason singled out by many economists is our low
savings rate
Saving as a Percentage of Disposable Income, 1980-2000
9%
8
7
6
5
4
3
2
1
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Low savings rate means low productivity growth
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-12
The Me Generation and
Generation X
• The generations that came of age in the 1980s
and 1990s have not done as well as their
parents’ generation
– Their rallying cry was, “I want it all and I want it
now”
• They were born to shop and they believe you must “shop
till you drop”
– Less than one-third can afford to buy a home
• In the 1960s most couples could afford to buy a home
– Real wages are virtually the same as they were
thirty years ago
– Family incomes have risen only because so many
homemakers have gone [back] to work
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-13
U.S. Gross Saving Rate
Gross Saving as a Percentage of GDP, 1947-2000
20%
18
16
14
12
10
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
1997 2000
16-14
Gross National Saving as a Percentage of
GDP: Annual Average
Organization for Economic Cooperation and Development
22%
20
18
16
14
12
10
8
6
4
2
0
Korea
Japan Netherlands Belgium
France
United
Kingdom
United
States
Germany
The United States has had the lowest savings rate among the world’s
seven leading industrial nations.
16-15
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Capital Sending and Economic Growth
A.
Panels A and B show
identical production
possibility curves in 1994
The nation that allocates
the greater portion of its
resources to capital
goods has the greater
economic growth in 2004
B.
25
25
20
20
15
15
10
PPC 2004
PPC 2004
10
B
PPC 1994
5 PPC 1994
5
A
0
0
5
10
15
Units of consumer goods
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
5
10
15
Units of consumer goods
16-16
Net National Saving and Net National Investment
Percent of GDP
14
12
Net domestic
investment
10
8
6
4
Net national saving
2
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
From 1960-2000 our net investment rate exceeded our net savings rate
We had to depend on foreign investors to provide us with some of their savings to
make up the difference.
Federal Reserve Chairman, Alan Greenspan, has repeatedly warned, foreigners
will not be willing to accommodate us forever
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-17
The Labor Force: Rising
Quantity and Declining Labor
• In 1870, Americans, Germans, French,
Japanese, and British workers averaged
nearly 3,000 hours a year on the job
– Now it is less than 2000 hours, with much of
the decline having come since World War II
• How does our labor force stack up
against the rest of the world?
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-18
The Average Workweek
• Today, most people put in the standard
nine to five (or eight to four) workday
with an hour for lunch
– This is 35 hours of work a week
– In 1900 the workweek was 60 hours
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-19
The Average Workweek
• Most full-time workers are guaranteed 10
paid holidays a year
– Vacation time, paid sick leave, and personal
leave still has to be figured in
– Americans work slightly more hours than do
their counterparts in Japan and
considerably more than those in Germany
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-20
The Average Workweek
• The Labor Department measures the
average workweek per job, not per
worker
– If you work 35 hours on one job and 25
hours on a second job, the Labor
Department would say that you have an
average work week of 30 hours
• You are actually working 60 hours
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-21
The Average Workweek
• The typical married-couple family with
children put in 256 more hours of work
in 1999 than in 1989
• More people working more hours
certainly raises output
– But, what does it do for productivity?
• We measure productivity as output per unit of
input
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-22
The Average Workweek
• As the unemployment rate declined in the
late 1990s, some of the workers most
recently hired – many of whom had
recently left the welfare roles – were not
as productive as the workers who had
more work experience, education, and
training
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-23
Our Declining Educational
System
• Business firms are having trouble finding
secretaries who can spell and put together
grammatically correct sentences
• Law firms spend millions of dollars teaching
their attorneys how to write
• Fast-food restaurant chains have found it
necessary to place pictures on their cash
registers because so many of their clerks are
numerically challenged
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-24
Our Declining Educational
System
• More people than ever are attending
college but our labor force is less welleducated
– Our educational leaders figured out they
could get more students through the
educational system by lowering standards
• The quality of our labor force has been
derided, especially in comparison with
those of other leading industrial nations
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-25
Our Declining Educational
System
• Our schools are failing us in an age when
literacy, numerical skills, and problem solving
ability are crucial in the workplace
– Most high school students cannot do simple
arithmetic without a calculator
– When they enter college , one out of three freshman
must enroll in at least one remedial course
• If this is “higher education” what must be happening at the
lower levels?
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-26
Our Declining Educational
System
• Despite our educational problems, the United
States must be doing something right
– The U.S. has less than 5% of the world’s population,
but, in the 1990s, Americans won 59 percent of the
Nobel prizes in economics, 59 percent in physics,
and 60 percent in medicine
– The U.S. is a world leader in computers,
telecommunications, and finance
– Clearly, the upper strata of our work force is very
smart and well educated
• But what about the rest of us?
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-27
Our Declining Educational
System
• There is virtual agreement that
improving our educational system holds
the key to high productivity growth and,
ultimately, to a high rate of economic
growth
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-28
The Permanent Underclass:
Poverty, Drugs, and Crime
• The United States has a permanent
underclass constituting 10% of our
population
– These people are supported by our tax
dollars, and many are members of thirdand-fourth-generation welfare families
– No other industrialized nation in the world
has such a large dependent population
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-29
The Permanent Underclass:
Poverty, Drugs, and Crime
• Closely associated with poverty are drugs
and crime
– Although poor people are much more likely
to be afflicted by both drugs and crime,
these problems also affect the lives of
virtually every American
– Drugs and crime have taken an enormous
toll, both socially and economically
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-30
The Permanent Underclass:
Poverty, Drugs, and Crime
• Poverty amid plenty is an apt description of
America today
• Since the mid-1990s
– The poverty rate is down sharply
– The welfare roles have been cut in half
– The crime rate has fallen
• Since these trends do tend to lessen during
economic booms, it is too soon to tell whether
these are the beginning of a long-term trend
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-31
Restrictions on Immigration
• This country was built by immigrants
• Before the 1920s, virtually anyone who
wanted to come to the United States
could
– In the early years of the 20th century, nearly
a million people came here each year
– Restrictive immigration laws were passed to
prevent further dilution of our vaunted
northern European stock
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-32
Restrictions on Immigration
• Immigrants are often willing to work 14
or 16 hours a day, seven days a week
• Within a couple of years, an immigrant
has typically saved enough to open a
small business
• Immigrants may never get rich, but their
children will go to college
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-33
Restrictions on Immigration
• Today, with immigration restricted to
slightly over 300,000 people a year, we
are deprived of much of what made our
economy grow
• In recent years, nearly half the winners in
a Westinghouse Talent Search
competition were foreign born or
children of immigrants
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-34
Restrictions on Immigration
• A study by the National Academy of
Sciences released in 1997 concluded that
immigration added perhaps $10 billion a
year to our GDP
– But it did slightly reduce the wages and job
opportunities of low-skilled American
workers and temporarily placed a fiscal
burden on state and local governments
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-35
Restrictions on Immigration
• With unemployment rates at record lows in
1999 and 2000, many jobs, especially in hightech fields, became difficult to fill
• On the lower end of the job ladder were the
nation’s six or seven million illegal immigrants
– If these immigrants were expelled tomorrow,
thousands of restaurants, hotels, farms, poultry
plants, and garment factories would be forced to
close for lack of workers
– Even the Immigration and Naturalization Service
(INS) has stopped trying to pick up illegal aliens
• A downturn in the economy could lead the INS to reverse
this policy
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-36
The Role of Technological
Change
• Technological change enables us to
produce more output from the same
package of resources, or, alternatively to
produce the same output with fewer
resources
– Toyota, which uses robots extensively,
produces half as many vehicles as general
Motors with only 5 percent of GM’s number
of workers
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-37
The Role of Technological
Change
• The rate of technological change may well
be the single most important determinant
of a nation’s rate of economic growth
• A nation’s educational system plays a
basic role in promoting a high rate of
technological change
– Over the last 15 years computer literacy has
increased exponentially while basic reading,
writing, and math skills have declined
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-38
The Role of Technological
Change
• Nobel Prize winner Robert Solow said in
1987, “you can see the computer age
everywhere but in the productivity
statistics”
• In 2000 he said, “you can now see
computers in the productivity statistics”
• Between 1973 and 1995 the annual rate of
productivity growth was about 1.5%, and
it has more than doubled
– How much of this increase was due to
computerization?
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-39
The Role of Technological
Change
• Stephen Oliner and Daniel Sichel, two
economists at the Federal Reserve
concluded that computers were
responsible for as much as two-thirds of
productivity increases
• Robert Gordon of Northwestern
University believes that labor productivity
gains have been confined almost entirely
to computer manufacturing and, more
generally to durable goods manufacturing
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-40
The Role of Technological
Change
• Can these opposing views be reconciled?
• Perhaps the problem lies in productivity
measurement itself, especially in the
service industries, which are notoriously
difficult to measure
– How do we measure output at McDonald’s,
Delta Airlines, or your family doctor?
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-41
Additional Factors Affecting
Our Rate of Growth
• In the 1970s six other factors retarding our
rate of economic growth came into play
–
–
–
–
–
–
Higher energy costs
Environmental protection requirements
Health and safety regulations
Rising health care cost
Crumbling infrastructure
High military spending
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-42
Conclusion
• Why was our productivity growth so low from
the mid-1970s to the mid-1990s and why did it
pick up again?
–
–
–
–
–
Our low savings rate
Our low rate of investment
The rising quantity of labor
The declining quality of labor
The growth of the permanent underclass and its
attendant problems of poverty, drugs, and crime
– Restrictions on immigration
– Computerization
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-43
The Productivity of Labor: An
International Comparison
• Which country in the world has the
highest productivity per worker?
– The United States
– Our lead was so big that even though a few
other countries have been gaining, they
haven’t caught quite us yet
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-44
The Productivity of Labor: An
International Comparison
Average full-time worker in 1990
Country
Dollar value of good and services produced
American worker
$49,000
French worker
$47,000
German worker
$44,200
Japanese worker
$38,200
Two reasons that international comparisons of worker output are difficult are that
(1) no two national accounting systems are identical and (2) there are daily
fluctuations in the exchange rates among the world’s currencies
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-45
Retail Productivity in Japan versus the
Same Type of Store in the U.S., 1999
Discounters
93%
Convenience stores
88%
Specialty chains
84%
Department stores
70%
Supermarkets
60%
Retail average
50%
Small traditional shops
33%
Based on operating income for each hour worked, Japanese retailing operates, on
average, at about half the efficiency of American retailing
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-46
Economic Growth in the LessDeveloped Countries
• The world can be divided into three
groups of countries
– The industrialized nations
– The newly industrializing countries (NICs)
– The less developed countries (LDCs)
• Those who live in the LDCs are the people who
really have problems
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-47
Economic Growth in the LessDeveloped Countries
• The big question is how to get from LDC to
NIC and, ultimately to industrialized
• The only way to industrialize is to build up
capital in the form of new plant and equipment
– There are two main ways of doing this: working
more and consuming less
• Since the poor nations are barely at subsistence level it’s
pretty hard for them to consume less
• Because there is often a great deal of unemployment in
preponderantly agriculture economies, those who want to
work more have a hard time finding work
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-48
The 10 Richest Countries in the World, 2000
$43,570
40,000
$40,080
$34,330
30,000
$33,260 $32,380
$30,060
$29,340
$26,570
$25,380 $24,780
20,000
10,000
0
Luxembourg
Norw ay
Sw itzerland
Denmark
Japan
United States
Belgium
Singapore
Germany
Netherlands
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-49
The Malthusian Theory of
Population
Malthusian theory predicted that famine would, within perhaps a
few generations, beset the world
This was inevitable because of a tendency for the world’s population
to double every 25 years
Malthus believed that the population tended to grow in a geometric
progression – 1, 2, 4, 16, 32 – and that the food supply would tend to
grow in an arithmetic progression – 1, 2, 3, 4, 5, 6
He indicated that population increases could be checked by war,
pestilence, famine, or moral restraint
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-50
The Malthusian Theory of
Population
• Was Malthus right? Surely not in the
industrialized countries
• Two things happened to ward off Malthus’s
dire predictions
– Because of tremendous technological advances in
agriculture, farmers were able to feed many more
people
– As industrialization spread, more and more people
left the country for the cities
• Birth rates fell
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-51
The Malthusian Theory of
Population
• The less-developed countries (LDCs) are
caught in a bind
– The Malthusian positive check of a high
death rate has been largely removed by
public health measures
– Because these countries have not yet been
able to industrialize and urbanize their
populations, birth rates remain high
– Populations in LDCs are doubling every 30
to 35 years, putting hundreds of millions of
people in peril of starvation
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-52
The Malthusian Theory of
Population
• Many LDCs clearly will never be able to
begin industrializing without outside help
– Today, more than two-thirds of the people in
the world live in LDCs, and in those
countries about half live at or near the
subsistence level.
– Most live in abject poverty, with no hope
that they or their children will have better
lives
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
16-53