Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change by Edmund S. Phelps

Author:Edmund S. Phelps [Phelps, Edmund S.]
Language: eng
Format: mobi, pdf
Publisher: Princeton University Press
Published: 2013-08-18T14:00:00+00:00

FIGURE 7.3 Market capitalization and labor productivity: business output per employed worker. Market capitalization variable measures the value of shares in the corporate sector in 1988. Labor productivity is calculated as business output per employed worker in U.S. dollars. The employment rate is the ratio of total employment to working-age population. (Sources: Morgan Stanley International; OECD.)

This wonderful ratio is an even better predictor of national employment a few years ahead, as Figure 7.4 shows.13 Remarkably, the size of the market-cap-to-output ratio in 1990 would have permitted one to forecast rather accurately the countries that rode the wave of the internet revolution arising in the second half of the 1990s. While it is intuitive that a relatively high rate of idea formation, in leading very probably to a high rate of innovation, tends to result in high productivity, a reader might wonder whether the path from high innovation to high employment is on safe ground. Might innovation destroy more jobs than it creates? It might at any given place and time. It may be that the phenomenal economic advances occurring in the 1930s hindered the climb out of the Great Depression more than they helped. But in the most common (and most studied) case, two positive effects are working. First, innovation in the form of new consumer goods or in the production of existing consumer goods, which tend to be capital intensive, by lowering their prices, lifts up the real value that firms making capital goods place on having added labor, just as it raises the value of the enterprises that make them; and that sparks new hiring. Second, when productivity is streaking ahead, pulling wages in its train, workers’ wealth feels smaller to them—it is smaller relative to their improved wages—so they are more willing to work, to move, and to take a chance on a different career. An innovation must be very labor-saving to overturn these effects.14

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