Higher output means higher incomes
Published October 31, 2019
By John Hood
So far this decade, North Carolina’s economy — as measured by inflation-adjusted gross domestic product — has expanded by an average of 1.7 percent a year. That’s a bit faster than the Southeastern average but slower than the national one.
In these fractious times, if there is anything that virtually every North Carolinian agrees would make our lives better, it would be an even faster growth rate for North Carolina’s economy than we’ve experienced since the Great Recession.
How can we make that happen? Policy makers and policy shapers have no shortage of ideas. Conservatives think North Carolina should intensify its tax and regulatory reforms to encourage private investment in new and expanding businesses. Progressives think North Carolina would grow faster if state government spent more both on public investment such as infrastructure and on consumption items such as Medicaid. Centrists often emphasize the value of business recruitment and incentive programs.
Although I find the conservative position most persuasive, I also believe the question is exceedingly difficult to answer to everyone’s satisfaction. Each camp has its own set of preferred studies and theoretical models. And you can’t just eyeball the raw numbers and draw valid conclusions, because so many trends and factors other than choices made by policymakers are constantly at play.
There’s another issue, too. Some argue that even if the economy were growing faster, the gains would not be widely shared. They assert that while changes in worker productivity and worker compensation were closely connected from the end of World War II to the early 1970s, they have since diverged. Without strong labor unions, higher minimum wages, and other government interventions, say many progressives, simply boosting productivity and thus growth will fail to boost living standards, because business owners and shareholders will reap the lion’s share of the proceeds.
They’re mistaken. The statistics they cite for the divergence between worker productivity and compensation are grossly misleading. They rely on inconsistent wage data and exaggerated inflation measures. Measured properly, average compensation per hour rose 81 percent from 1973 to 2017, after adjusting for inflation, while productivity rose by 83 percent. That’s not a significant difference. Worker output and pay appear to be related across occupations and locations, too.
In other words, productivity remains most important lever for accelerating economic growth in general, and personal incomes in particular. Moving that lever forward requires some combination of three “push factors”: skills, tools, and innovation.
Think about them as forms of capital. When we acquire new skills, perfect the ones we already possess, and learn better ways to apply them, that’s human capital. When workers get access to better tools, equipment, facilities, and infrastructure, that’s physical capital. And when we produce and disseminate innovations, we expand our intellectual capital.
Public policy has a role to play in encouraging all three forms of capital formation. Although we may disagree about specific reform strategies, all North Carolinians share the goal of better education and training — from preschool to graduate school, of course, but also including the critical skills that young people learn outside the classroom, at home and elsewhere, as well as the technical training that occurs every day on job sites, on community college campuses, and online.
Workers also get more productive when they, their colleagues, and other producers throughout the economy have access to more and better tools. Public investment is part of the answer, especially in transportation infrastructure. But private investment is vastly greater and more important here.
Finally, more growth will require more innovation — not just in products and technologies, although they are important, but also in the structure and leadership of organizations. This is primarily a private-sector phenomenon, too, although public investment in basic science is helpful and policymakers need to remove licensing and other regulatory barriers to the kind of disruptive innovation that will truly move the productivity needle.
Framing a debate doesn’t automatically settle it. But focus is useful. How can we make the work of North Carolinians more valuable?