TITLE:
Is There a Productivity Puzzle in the OECD Economies?1 Or Why Has Economic Recovery Since the Great Financial Crisis Not Produced Increased Inflation?
AUTHORS:
Andrew Hughes Hallett
KEYWORDS:
Productivity Puzzle, Capital-Labour Substitution, Static Real Wages, Productivity Dynamics
JOURNAL NAME:
American Journal of Industrial and Business Management,
Vol.8 No.8,
August
22,
2018
ABSTRACT: This
paper investigates whether there has been a structural shift in inflation since
a recovery began in the OECD economies. For policy purposes, it is
important to be sure that such shifts are significant statistically, are likely
to be sustained over the near future and be evenly distributed over the member
economies so that no one of them is damaged by anti-inflation measures taken to
help others. We approach the problem in two steps: first we examine the
circumstantial and informal evidence, and then conduct formal statistical tests
for structural changes in euro area inflation in 2015-2016. We find no evidence
of a structural change. An even distribution of inflation criterion is the
closest to being satisfied, but the other two are far from satisfied in any
formal sense. The question remains: why has there been no inflation in the
recovery since 2014? To answer that question, we demonstrate how low growth in
real wages and self-reinforcing low productivity growth produces slow output
growth and low inflation; and how low real wages and productivity in turn lead
to low investment. This model fits the data well, down to the lack of labour
and total factor productivity, and to the substitution of cheaper labour for
excess capital stock. It implies a fall in investment spending (also seen in
the data) that extends the period for which the low productivity-low inflation
outcomes apply.