DP1159 Is There a Trade-off between Unemployment and Productivity Growth?

Author(s): Robert J Gordon

Publication Date: April 1995

Keyword(s): Labour Market , Minimum Wage , Productivity , Unemployment

JEL(s): D24 , E24

Programme Areas: Human Resources , International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP1159.asp

This paper shows how misleading is the facile contrast of Europe following a path of high productivity growth, high unemployment, and relatively greater income equality, with the opposite path being pursued by the United States. While structural shocks may initially create a positive trade-off between productivity and unemployment, they set in motion a dynamic path of adjustment involving capital accumulation or decumulation that in principle can eliminate the trade-off.The main theoretical contributions of this paper are to show how a productivity-unemployment trade-off might emerge and how it might subsequently disappear as this dynamic adjustment path is set in motion. Its empirical work develops a new data base for levels and growth rates of output per hour, capital per hour, and multifactor productivity in the G-7 nations both for the aggregate economy and for nine sub-sectors. It provides regression estimates that decompose observed differences in productivity growth across sectors. It finds that much of the productivity growth advantage of the four large European countries over the United States is explained by convergence and by more rapid capital accumulation, and that the only significant effect of higher unemployment is to cause capital accumulation to decelerate, thus reducing the growth rate of output per hour relative to multi-factor productivity.