NCPA - National Center for Policy Analysis

Innovations Create Jobs

October 1, 2003

The slow pace of job creation is clearly the most serious political and economic problem in the country today. Ironically, the biggest barrier to job growth is something economists normally applaud: high productivity:

  • In the second quarter of this year, output per hour in the nonfarm business sector was up 6.8 percent.
  • In 2002, productivity increased 5.4 percent. These numbers are twice or more than the historical trend.

When productivity is high, it means that producers are able to increase their output without having to hire more workers. Given the high overhead costs for hiring workers in today's economy, companies have been substituting computers and machines for people. This allows the remaining workers to be well paid, but reduces the demand for labor. People now worry that this trend will continue and fewer and fewer workers will be needed to produce what is needed, with the result that unemployment will stay high indefinitely.

However, job growth is strongly correlated with productivity growth. That is, increased productivity leads to higher production and increased employment opportunities, rather than the reverse, explains Bartlett.

The reason is that output-increasing innovations always lead to new possibilities. As historian Daniel Boorstin once put it, "People said the telephone would replace the mails, the radio would replace the telegraph, the TV would replace the radio. But what new technology does is discover unexpected roles for the old."

Source: Bruce Bartlett, "Innovations Create Jobs," National Center for Policy Analysis, October 1, 2003.

 

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