Thus, we would expect that in industries with demonstrated low productivity and high or rising demand, such as health care and education, to see prices rising well above the level of inflation.
The magnitude of the price rise (change in relative prices really) can be calculated in a highly stylized example that assumes that the quantity of the output consumed in the low productivity industries remains a constant share of all output, i.e. that the contribution to GDP from the low productivity industries remains fixed. In this case, the percent change in relative prices will be equal to the difference in productivity. For example, if “average” productivity is 2% and a low productivity industry is running at 1% then we would expect the output prices of the low productivity industry to rise 1% above and beyond the level of inflation. An important point to take from this example is that price rises confined to one segment of the economy can be entirely attributable endonegenous economic factors that are independent of central bank actions and will occur independent of any inflation rate. Too often we see various writers attributing price rises in certain sectors of the economy as caused by excess money creation simply finding the most price inelastic demand. And further, in a bit of circular logic, that these price rises prove that excess money has been created.
Another interesting result is that the low productivity industry will employ an ever-larger percentage of the workforce. Thus, over time and assuming output shares are relatively fixed, the percentage of the labor force employed by the low productivity industries will increase, with, obviously, a corresponding drop in the percentage employed in the more productive industries. Remember that the next time you hear someone bemoaning the loss of US manufacturing jobs and the increasing amount of labor employed in the service sector (large segments of the service sector have very low productivity). |
