Why GDP No Longer Measures Welfare

The other day the New York Times wondered, Why is income falling with the recession officially over? I suggested then—and I’m far from alone in this—that the Gross Domestic Product is no longer an accurate way of measuring the general welfare of the American population. In the earlier post (link), I showed growing inequality in income as one of the interesting indicators. It suggests that while GDP is a good measure of the welfare of the top quintile of the population, it does not measure welfare over all.

Today I’ll contrast the GDP-performance with Jobs-Performance in our economy over an extended period of time. I will show the two in raw numbers and in index formats. First the raw numbers:

[Note: Clicking through enlarges image. But changes introduced—by Google? others?—now do not bring you back to the post if you click on the Back Arrow. Instead, when wishing to return, press Esc.]

Total employment is shown here in thousands, GDP in constant 2005 dollars. Both were growing in the 1939-2010 period, but as the annotations show, the growth of employment advanced at a rate of 2.1 percent a year while the growth of GDP was 3.6 percent annually. The two curves, therefore, gradually converge.

Now this pattern of growth suggests that productivity may be responsible for the different rates of growth. True. In 1939 each employed person generated $34,978 in GDP (GDP divided by employment). In 2010, each employees generated $100,818 in GDP. These being constant dollars, productivity, measured in this “gross” manner, increased just a shade under 3-fold. And here the negatives associated with productivity appear. GDP, which we casually associate with the general welfare, requires fewer and fewer people. If productivity had not advanced, thus stood at 1939 levels in 2010, we would have employed three times as many people, 374 million versus 130 million. We don’t have that many workers, to be sure, so productivity has a positive aspect too. But why then is income falling? That is because productivity gains are not shared with the laboring masses. Income growth is always lower than growth of productivity.

The growth rate in employment has also slowed. In the 1990-2010 period, it was 0.9 percent a year—over against GDP growth in that same period of 2.5 percent. The difference between these two rates (1939-2010=1.5%, 1990-2010=1.6%) has been increasing.

The bottom line is that general welfare means employment for all who seek it; GDP growth means fewer and fewer jobs. You draw your own conclusions.

The next chart sharpens the view of GDP and Employment growth. It shows both at 100 in 1939—and then changes based on that index into the future. What you see is the marginalization of employment over time. The GDP rests more and more on goods produced either by machines or labor overseas. China should watch our GDP and rejoice. We, here at LaMarotte, will keep staring at the jobs numbers instead.