February 05, 2017
It’s often said that the economy is too simple for economists to understand it. Neil Irwin gave us evidence to support this assertion in a NYT column today. The piece both raises the question of whether the economy is too dynamic, or not dynamic enough, and what we can do to protect workers if it is too dynamic.
On the first question, we really don’t have to debate much. We have good measure of the economy’s dynamism, it’s called “productivity growth.” Productivity growth measures the increase in the amount of output in an average hour of work. It has has been extremely slow in the last decade, just 1.0 percent annually. It was rapid from 1995 to 2005, at 3.0 percent a year, but this was just equal to the pace during the period from 1947 to 1973. So, we clearly have no reason to worry that the economy is too dynamic.
In terms of protecting workers, the piece makes the point that workers who lose their job due to innovation are an important externality. This is obviously true. It’s also not a new point. Other wealthy countries require that companies give severance pay to longer term workers. This both provides a bit of insurance to workers and effectively causes companies to internalize at least part of the costs associated with throwing a long-term employee out of work.
For example, if companies are required to pay two weeks of severance pay for each year of work, then a company planning to lay off a worker who has been employed for twenty years would have to pay forty weeks of severance pay. This would be a substantial disincentive to laying off workers. Companies would then have more incentive to modernize existing facilities and to retrain workers so they have the skills needed to be as productive as possible.
One of the great things about required severance pay is that it can be mandated at the state level. This means that there is no need to wait until Donald Trump and the Republican congress decide it is a good idea. States with progressive governments can adopt laws to this effect tomorrow. (At the moment, Montana is leading the way, with a law that prohibits dismissal without cause.)
Anyhow, this really is not a hard problem, nor is it new. We can provide a substantial degree of protection to workers from job loss due to technology or any other reason. We have chosen not to do so.
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