A Tradable Future: Unemployment and the Productivity Curse

Edward Luce sparked a wide-ranging debate this week by arguing in the Financial Times (the article is behind a paywall) that America's labor market is a wreck.  Luce's point wasn't surprising, but the way he got to it was.  Jobs aren't forthcoming in the areas of our economy that are the most productive today and that cater to the "middle-skilled."  The result is a mass of underemployment and "waning dynamism."  

One sentence from his essay captured his entire concern: "According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent." One of the sharpest comments came from Ryan Avent at The Economist where, after summarizing Luce and others, he noted something really important.  That is, that the way Luce spoke about economic sectors (especially manufacturing) merely threw up artificial barriers that reveal nothing about the true make-up of our economy or our labor market.

"...while the distinction between manufacturing and services is often meaningless, the distinction between tradability and non-tradability of products is most certainly not."

Avent makes the argument that tradable goods (as opposed to non-tradable goods, such as haircuts) have a way of defining the state of the rest of the economy.  Since these goods theoretically can (as the name implies) be traded anywhere in the world, the price that can be charged for the good tends to fall into a narrow band defined by the lower cost competitors.  And since you can't charge much more for the same good to get more income, the only choice is to make more of them.  There ends up being a direct line between productivity and income then.  This productivity leads to higher national income, which will then spillover into the market for non-tradable goods.  

Conclusion?  "An overall higher level of income in an economy, in other words, is only possible thanks to higher productivity in the production of tradables." Wonkiness aside, here's the point.  Luce and Avent look at today's job losses and stagnating incomes and guess that the real problem then is with productivity.  How much we're producing for a set amount of work just is not keeping up with the degree to which prices are falling and labor costs are rising.

Labor markets and economies more broadly are complex beasts that aren’t readily reduced to pithy suppositions.  Nevertheless, Avent’s focus on productivity explains a lot about our stagnant incomes and shows where we need to look for answers to unemployment in America.  This is not necessarily a problem with you and me not working hard enough.  It’s that our economy as a whole has plucked the “low-hanging fruit” of progress.  It’s a challenge of finding the right big picture solutions that can make our hard work that much more worthwhile.  Together with much needed reforms in immigration and education, a pick-up in productivity will come then from heretofore unseen innovations in tradable goods and new ways to pair man and machine in making these goods.