Effects of Productivity on the economy

Productivity has become the new boogeyman by which the media has it's seizures. The usual argument runs something like this:

Productivity increases mean that workers are producing more goods than they previousely were. Since the same amount of goods can be produced by fewer workers, this will lead to less people being hired and to increased unemployment. THis is why (insert Bush bashing comment here) is a neo-nazi who is destroying (insert said industry here).

This formulation is, however, bunk.

First, if a firm is becoming more profitable, it will not sit on the extra money it is earning (which the above formulation assumes as fact). It will re-invest the money, expand, and create new jobs. Call it creative destruction or whatever (we economists come up with really good names for things, don't we?), but the fact is that in 1900 half the population was farmers. Today 2% are but we produce a vast more amount of food. What happened to these workers? Because we have a dynamic, open economy they were shifted into other industries that paid more.

Don't believe me? Take a look at this statement from a recent study by the Dallas branch of the Federal Reserve:

The United States will continue to move up the hierarchy of human talents as it becomes more productive. Fewer jobs at relatively lower pay will be available for those who offer employers only muscle power, manual dexterity or formulaic intelligence. Americans who want to prepare for the better jobs of the future will concentrate on developing their creativity, imagination, people skills and emotional intelligence.


Arnold Kling notes that the study shows that the largest increases in jobs occured in nursing, engineering, and design. Declines occured in secretarial work, sewing machine operations, and farm workers.

Motto of the story: the United States economy is demanding strong analytical thinkers who can apply their tools towards developing the economy. Perhaps we should outsource the journalists and make them take some math and business classes.