The Productivity and Jobs Connection: The Long and the Short Run of It Carl E. Walsh Ask any economist and he or she will tell you that faster productivity growth leads to higher real wages and improved living standards. So, from those perspectives, the recent evidence of strong productivity growth in the U.S. is good news. Figure 1 shows, by decade, the relationship between productivity growth and the growth rate of real labor compensation per hour. The decades of slow productivity growth have been decades of slow growth in real wages; decades of faster productivity growth have been decades of faster growth in real wages. Yet a quite different picture of productivity growth dominates the news. Numerous newspaper articles blame strong productivity growth for a “jobless recovery,” as economic output grows yet employment does not. Faster productivity growth, according to this view, allows firms to increase production without increasing employment. While recent employment figures suggest that job growth may finally be accelerating, the slow growth in new jobs during the past two years has raised doubts about the benefits of faster productivity growth. These two views of productivity growth seem dramatically inconsistent. If higher productivity allows firms to shed workers, how can it raise wages and living standards? If productivity does lead to improved wages and living standards, why do so many feel the recent productivity growth has left workers behind? To answer these questions, and to understand how both views contain part of the truth about productivity, we need to distinguish both between a microeconomic and a macroeconomic perspective on productivity and between the short-run and long-run effects of changes in productivity. This Letter discusses these different perspectives on the productivity-jobs connection. The macro versus micro perspective Variations in productivity growth have both microeconomic and macroeconomic effects. Microeconomics investigates the structure of individual industries and markets, and the behavior of individual firms and consumers. From a micro perspective, productivity growth and new technological innovations are constantly leading to structural changes in the economy, causing one industry to expand in terms of both production and employment, while other industries shrink. The rapid growth of the high-tech industry during the 1990s and the effects of research in biochemistry on the pharmaceutical industry are just two recent examples of such changes. At the same time, technological This article originally appeared in the Number 2004-18; July 16, 2004 FRSB Economic Letter. Opinion’s expressed in this article are those of the authors and do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. 25