Here are some attempts by economists to understand the relation between unemployment and productivity:
1. From a static (and rather naive) viewpoint, productivity gains may lead to unemployment in the very short run (or to lower employment at the firm level), as the same amount of output can now be produced with less 'labour input'
2. In a more dynamic perspective, productivity affects growth in the following ways:
- if the sum of productivity gains is translated into higher wages, then in a keynesian world this boosts effective demand and thus lowers (future) unemployment, while in a neoclassical world this does not affect equilibrium unemployment
- if productivity gains are not passed entirely to the workers, then in a Keynesian world reductions in unemployment can be achieved by public expenditure which is financed through taxes on the now higher profits, while in a neoclassical world unemployment falls as profits generate new investments and/or more competitive products/exports
3. From a more micro-behavioural perspective, the direction of causality runs the other way around: 
- in an efficiency wages framework, higher unemployment acts as a "threat" mechanism (discipline device) and thus increases workers' effort and productivity
- however, unemployment (especially long-term unemployment) is associated with a depreciation of skills and 'employability' and thus to a longer-run (relative) decline in productivity
4. There is also a statistical / compositional effect of unemployment: if a sorting mechanism operates in the labour market, so that the unemployed are always the least skilled, higher unemployment improves the skill composition of the employed workforce and thus (artificially) raises productivity

Vassilis Monastiriotis


-----Original Message-----
From: Ray Thomas [mailto:[log in to unmask]]
Sent: 01 April 2005 10:38
To: [log in to unmask]
Subject: Re: Productivity and growth


I hope that John Whittington hangs on to his 'lack of education' in
economics.  Economists have never really got to grip with the functioning of
the labour market.  And that perhaps explains why the discussion on this
list about productivity has been so confused and confusing.

Traditionally economics has been defined as the study of the allocation
of scarce resources, so economists have always had a bit of difficulty in
dealing with the existence of unemployment.   If a resource is not scarce it
does not really fall within the subject matter of economics. It took what is
usually called the Keynesian revolution to persuade economists that letting
markets rip did not solve unemployment problems.

The economist faith in market forces effectiveness in the labour market is
still strong.   In recent decades economists have identified long-term
unemployment as the main problem. They believed that the scale of long-term
unemployment should have reduced the level of wages and have blamed the
benefits system for encouraging people to remain unemployed.   These beliefs
are not consistent with the statistical evidence.

Please do not read into this an attack on the 'new deal' and the welfare
to work programme.   These kinds of measures are best seen as part of what
John Longsdon gallantly calls 'management and investment'.    But, to go
back to the starting point of the discussion, economists' difficulty in
dealing with the labour market does help explain why they don't see any
clear connections between increasing productivity and unemployment.

Ray Thomas
35 Passmore, Tinkers Bridge, Milton Keynes MK6 3DY
Email: [log in to unmask]
Tel/Fax 01908 679081
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