Wednesday, July 18, 2007

Labour Addiction?

From the Globe:
Census-takers have given Canada less than a decade to kick its economic addiction to labour and find new ways to grow.

I am, shall we say, skeptical.

As economists generally acknowledge, long-term, sustained economic growth, especially in developed countries, comes from productivity gains. This makes sense: If you can produce more in your workday, you obtain the means to consume more. The article acknowledges this:
...the only way improvements in Canada's standard of living can be maintained is through major gains in productivity...

However, the understanding of the concept of productivity proves somewhat limited:
The most obvious solutions are for companies to find ways to prevent employees from retiring early, and for governments to increase immigration.

As we have seen in the Solow model, an increase in the labour force decreases the average standard of living from diminishing marginal returns. Even if this is not accepted, obtaining more labour is not synonymous with increasing productivity: i.e. doing more with the same amount of input.

Again, we see a refusal to acknowledge this concept:
In other words, companies need to increase their output by using relatively less labour, and investing instead in machinery, equipment, technology and labour-saving strategies.

Purchasing more capital for each worker is not how productivity increases, either. Output will rise, to a point (assuming that we're currently below the efficient capital/labour ratio), but this is not a productivity gain: We're doing more with more.

The key word is mentioned: Technology. Productivity stems from more efficient technology, not by substituting more capital for labour. (We are, of course, ignoring points about spillover effects, learning by doing, blah blag blah, but I am skeptical to the extent this can be achieved over the long term, since I have yet to see a cognet argument these are not subject to diminishing marginal returns as well.)

So, economics predicts: Smaller labour force leads to higher standard of living, lower national GDP. This is noted by the economics profession in the article, though not in the Solow context I've been running with:
The natural pressures of pending labour shortages may well shake Canadian companies into becoming more productive, said Peter Dungan, economics professor at the University of Toronto.

Remember, caring about national GDP isn't important. Sustaining that in the face of a shrinking labour force is tough, but ultimately irrelevant compared to the per capita.

I'm hesitant to apply the 'economic abuse' label, but it's tempting. Not a sufficiently flagrant infringement to be carded, though.

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