PRODUCTIVITY AND THE NAIRU
Chapter 6 introduced a very important topic--productivity and the NAIRU. This topic was examined within the context of a discussion of unions and labor law. This chapter pursues this issue of productivity and the NAIRU somewhat further, beginning with a brief review of how a change in productivity growth can affect the NAIRU.
As discussed in Chapter 2, at any given time there is a limit to the real wages that an economy can afford to pay its workers; in other words, there is a "feasible real wage." The level and rate of growth of feasible real wages depend on the level and rate of growth of productivity A man cannot run faster than his legs will carry him, and an economy cannot pay real wages in excess of the underlying productive capacity of the economy A slowdown in the rate of growth of productivity in the economy means that, other things being equal, the rate of growth of aggregate feasible real wages also slows down. If workers do not recognize this slowdown and they continue to demand real wage increases that are in excess of feasible real wages, inflationary pressure will result and unemployment will increase. The resulting unemployment impacts marginal workers the hardest. In essence, what happens is that protected workers (members of government bureaucracies, union workers, and others) win at the expense of nonprotected workers.
What has happened to U.S. productivity growth and unemployment during the past few decades? Figure 8.1 shows the 10-year moving average of annual unemployment rates discussed in Chapter 2 and a 5-year moving average of productivity (output per hour of all persons in the