Chapter 16 Economic Growth and Productivity 16-1 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 16

Economic Growth and Productivity

16-1Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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

16-2 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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



Development

– The industrial revolution made possible sustained economic growth and rising living standards for the first time in history


• The Industrial Revolution began in England around the middle of the 18th century



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



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



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



Development

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.16-9

0

500

1000 1200 1400 1600 1800 2000

1,000

1,500

2,000

2,500

3,000

3,500World GDP per person, 1000= 100

Economic Growth During the Last MillenniumThe Economist, September 23, 2000, p. 7.

16-10

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

Annual Rate of Productivity Growth, 1960 -2002

Economic Report of the President, 2003, Economic Indicators, May 2003

16-11


GDP per Hour Worked, 2000, Selected Countries (In 2002 U.S. dollars)

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’ generations– 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


16-13


U.S. Gross Saving Rate

Gross Saving as a Percentage of GDP, 1947-2000

Economic Report of the President, 2001, Survey of Current Business, May 2003

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Gross National Saving as a Percentage of GDP. Annual Average

Organization for Economic Cooperation and Development

The United States has had the second lowest savings rate among the world’s eight leading industrial nations.

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25

20

15

10

5

0

Units of consumer goods

A.

5 10 15

PPC 1994

PPC 2004

25

20

15

10

5

0

Units of consumer goods

B.

5 10 15

PPC 1994

PPC 2004

B

A

Capital Sending and Economic Growth

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

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?


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

• In the year 2000– Americans worked 1,978 hours– French worked 1,532 hours– Germans worked 1,467 hours– Dutch worked 1,346 hours



• 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



• 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



• 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



• 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


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



• More people than ever are attending college but our labor force is less well-educated– 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



• 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?



• Despite our educational problems, the United States must be doing something right– The U.S. has less than 5 percent 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?



• 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


The Permanent Underclass: Poverty, Drugs, and Crime

• The United States has a permanent underclass constituting 10 percent of our population– These people are supported by our tax

dollars, and many are members of third-and-fourth-generation welfare families

– No other industrialized nation in the world has such a large dependent population



• 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



• 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


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, close to

a million people came here each year– Restrictive immigration laws were passed to

prevent further dilution of our vaunted northern European stock



• Immigrates 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



• Today, with immigration restricted to slightly over 800,000 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



• 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


Restrictions on Immigration• With unemployment rates at record lows in

1999 and 2000, many jobs, especially in high-tech 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


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



• 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



• 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 percent, and it has more than doubled– How much of this increase was due to

computerization?16-37



• 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

• There has been a structural improvement in productivity that is still with us today



• 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?


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 costs– Crumbling infrastructure– High military spending– The effects of 9/11– The influence of special interest groups


Summary

• 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


Economic Growth in the Less Developed 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


Economic Growth in the Less Developed 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

– Another source of capital is grants and loans from the industrialized nations.



The Malthusian Theory of Population


Malthusian theory predicted in 1798 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, 8, 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



• 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



• 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• The AIDS epidemic is an exception

– 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



• 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– 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



Documents

Chapter 16 Economic Growth and Productivity 16-1 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved