05 January 2012
Innovation and Unemployment in Germany and the US
The graph above (data from the World Bank) shows manufacturing as a proportion of GDP for Germany and the US from 1985 to 2008 (2009 for Germany) showing in both cases a decrease of about 35%.
Now let's look at unemployment in the US and Germany from 2000 to present (data from the IMF).
Over this period, Germany's unemployment has decreased while that in the US increased by almost 100%.
This data alone should be enough to reject the hypothesis that technological innovation in manufacturing is a primary cause of current economic woes in the United States.
14 comments:
I prefer to look at employment rather then unemployment rates as unemployment is a 'fungible' number.
I don't see a substantially different trend between Germany and the US.
http://datamarket.com/data/set/1h7a/employment#!ds=1h7a|1ews=f.l&display=line&f=index&s=8gd
-1-Harrywr2
Thanks, but you do see that boom and bust in the US, right?
You seem to be misreading the article. It asserts that the American economy was ALREADY in a dire state BEFORE the 2008 melt-down. The only reason it didn't show was that the bubble in the real estate market had created paper wealth that people used to keep up their spending. The financial collapse of 2008 just revealed the truth about an already cored out economy.
There was no claim in that article that increases in manufacturing productivity caused the increase in unemployment shown in your graph. Productivity increases had already done their damage in the previous years, leaving a narrower base of income. The 2008 crisis was just an Emperor's New Clothes moment, exposing existing flaws
-3-Mark B.
Thanks, you write:
"The financial collapse of 2008 just revealed the truth about an already cored out economy."
Is Germany's economy "cored out"?
Also, with respect to loss of jobs and the argument by Stiglitz, please re-read this part:
"The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs."
Roger,
The comparison with Germany looks compelling until you look at the employment graphs over the last 32 years. In that time U.S. employment has grown by a whopping 46% while Germany's has grown by a paltry 13%. It seems clear that the two economies in a sense are very different. U.S. employment acts like a high-growth, high-risk stock that gives guaranteed growth over the long term but suffers from short-term volatility. Germany, on the other hand, is like a savings bond, providing guaranteed returns with slow growth and little volatility. Given that, would we really expect to see the effect of productivity change in Germany's unemployment rate?
That said, Stiglitz's comparison of today with the Great Depression seems forced and putting the blame on productivity increases is almost certainly wrong.
-5-Brian
Thanks, you write: "It seems clear that the two economies in a sense are very different."
I think that this is the key point -- both have seen a sharp reduction in manufacturing as a proportion of the economy, but very different economic outcomes.
Roger
unemployment figures are a political construct. The counting methods change many times, even during the tenure of one government. To make sense of long term unemployment data one would need to trace such changes in accounting.
Six or seven years ago in Germany everyone complained about high unemployment rates and then chancellor Schroeder pushed through his Agenda 2010, see here for a brief overview
http://en.wikipedia.org/wiki/Agenda_2010.
In this sense neoliberal economics did the trick at the expense of core employment sectors.
And because of its strong export orientation, Germany always prospers as a result of weak exchange rates, this was the case with the D-Mark, and even more so with the Euro.
These two aspects are crucial for comparative purposes.
-7-Reiner Grundmann
Hi reiner, yes, unemployment is a construct, of course so too is the economic category of "manufacturing". But both constructs are used in decision making and both are used as variables to be explained and influenced.
A qualitative interpretation of the data shown here is that (a) manufacturing has decreased a a proportion of both the US and German economies, and (b) more people are looking for work in the US than Germany. Fair enough?
Huh, Germany had a larger contraction than the United States did, but unemployment actually fell:
http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg&idim=country:DEU&dl=en&hl=en&q=gdp+growth+germany#ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_kd_zg&scale_y=lin&ind_y=false&rdim=country&idim=country:DEU:USA&ifdim=country&hl=en&dl=en
Germany apparently has labor laws in place to prevent mass layoffs and therefore took a big hit in manufacturing productivity during the recession:
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/images/GS1.jpg
While United States manufacturing productivity growth went nearly vertical:
http://mjperry.blogspot.com/2011/05/americas-amazing-manufacturing.html
Roger #8
No doubt Germany currently does better (than the UK or US) with regard to economic indicators, (un)employment being one. But it is not easy to establish the reasons for this. Much depends on your theory. Looking at few stats will not settle this. There is the exchange rate. And there are more factors to consider.
One theoretical option is to invoke neo-corporatism. Germany (plus Japan and Scandinavian countries) have close relations between labour, capital and the state which makes mass layoffs difficult if not impossible, thus retaining the core work force also in crisis situations (hence the slump in productivity, as Christopher points out). The downside is that these neo-corporatist arrangements offer fewer opportunities for 'marginal' workers: female, young, old, immigrant...
-10-Reiner
Thanks, I am not offering up a theory, but rather critiquing another (The theory that innovation in manufacturing is the cause of current US economic woes, including unemployment).
Admittedly, it is easier to critique a theory than to present a coherent alternative. That said, in both the German and the US cases, I'd argue that the decrease in productivity/unemployment are consequences of factors other than productivity gains in manufacturing. Thus, any theory will have to look elsewhere.
You are quite correct that that Stiglitz ignores the contrary evidence concerning productivity. He also ignores a number of other items, including
1. Economic growth is both rise in income per capita and rise in output per capita. That means that 200 times (or more) increase in per capita income since the start of the industrial revolution is by definition similar productivity per capita increases.
2. When advocating increased public expenditure he forgets (i) Japan tried it in the 1990s and failed. (ii) USA and many European countries had huge fiscal expansions in 2001 to 2007, and were running structural deficits as they entered recession. If deficit-financed investment is expansionary, then such deficits contributed to extending the boom. (iii) some of the countries have passed a fiscal tipping point. They have to cut expenditure to save the economies from total bankruptcy. The USA already has huge deficits and runs the risk of going the same way if reckless policies are pursued.
One other significant point: Germany's working age population is declining. All else equal, as long as productivity gains keep up with declines in population, there will be no net employment change.
Technology Review has an article on this very topic today:
http://www.technologyreview.com/computing/39319/?p1=A1
Unemployment and economic woes are not necessarily the same thing.
Comparing different economies is problematic. A relative drop in the % of GDP represented by manufacturing may have a different effect in one economy than it does in another.
Too many uncontrolled variables involved to isolate just two and make some kind of a determination related to causality or the lack thereof.
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