Will Denayer—The productivity puzzle explained. How right wing policies and neoclassical recipes destroy economic growth

‘America needs its unions more than ever.’ And ‘Labour reform could help restore the bargaining power of US workers.’ Can you believe that these are titles from articles in the Financial Times? 

Mario Draghi, the president of the ECB, recently boasted that since 2015 the euro-zone gained more than 5 million jobs. New cheap jobs yes, and productivity remains historically low. Today’s lacking investment means that technology does not substitute for labour – the normal trajectory in capitalism, instead cheap labour substitute for technology. As a result, productivity stalls and, with it, progress. Britain and the US, with their deregulated labour markets, constitute the best examples of this degenerative trend. Britain’s flat productivity reflects a combination of rapid automation in some sectors and the rapid growth of low-productivity, low-wage jobs. In the United States, eight of the tenfastest-growing job categories are low-wage services such as personal care and home health aides (see here).

The political consequences of this situation cannot be underestimated. After decades of right-wing policies, stripping away protections for workers, the flexibilisation of labour markets, destroying ‘government rigidities’ and waging wars against trade unions, it turns out that these neoclassical recipes decrease productivity.

The problem does seem to be immigrants taking jobs from native workers, as many believe. but rather exporting productive capital to take advantage of lower costs abroad, coupled with neoliberal labor policy that skews the domestic labor market toward capital by reducing the bargaining power of labor. This means that domestic workers are competing with lower cost embedded labor. A result is increasing economic inequality and lagging domestic demand as workers' income remains stagnant or shrinks.

This model is not working for workers (most people) of the developed world, although the emerging world is benefitting, which is different from the classical model of imperial-colonial capitalism in which productive capital investment and technological innovation were chiefly domestic.

Flassbeck Economics International
The productivity puzzle explained. How right wing policies and neoclassical recipes destroy economic growth

Will Denayer