Economic Report of the President 1994 - The American Presidency ...

Box 3-3.—Consequences of Productivity GrowthRising productivity has been shown to have a variety of beneficialeffects:• The prices of goods produced by industries that have hadrapid productivity growth have fallen relative to those ofgoods from industries with slower productivity growth.Chart 3-11 shows average productivity growth and pricechanges by industry for the 1950-90 period.• Periods of rapid productivity growth have been accompaniedby increases in real wages. The prices of productsin industries experiencing productivity growth also declinerelative to wages. This decline in product pricesmeans that real wages tend to rise during periods ofrapid productivity growth.• Periods of rapid productivity growth have also been periodsof low inflation. Productivity growth allows nominalwages to increase without putting pressure on prices.• Periods of rapid productivity growth have not been associatedwith large increases in unemployment In periodswhen productivity growth was more rapid, such as the1960s, unemployment rates have tended to be low. Incontrast, periods with slow rates of productivity growth,such as the 1970s, have been periods of relatively highunemployment.Since the use of more-educated labor has increased in all industries,a logical explanation of this trend is technical change. For example,one study shows that people who work with personal computersearn a substantial wage premium over those who do not,and that this can account for half of the increasing gap betweenthe wages of college and high school graduates.Although changes in labor demand induced by changes in thecomposition of trade do not appear to explain much of the increasein income inequality, the internationalization of the U.S. economymay affect wages in other ways. For example, the threat of increasedimport competition or of the relocation of a factory to anothercountry may undermine worker bargaining power or cause adecline in the number of workers employed in unionized firms. Atthis time, no reliable studies have properly quantified how importantsuch effects have been. In addition, there is no guarantee thatthe future will resemble the past. Trade could become a more importantfactor in bringing down the wages of less educated workersin the future. On the other hand, technical change could move in119