Monday, October 31, 2016

Nice resource for illustrating "Increasing Opportunity Costs" and the concave nature of the PPF

Here is a nice article on the great productivity slowdown in the US, and in the developed world for the most part.

The article is interesting throughout but the excerpt below caught my eye.

It goes to the edge but does not explicitly mention the important concept of "Increasing Opportunity Costs" and the reason the Production Possibility Frontier (or Curve) is "bowed", or concave from the origin.

While Services Sector Booms, Productivity Gains Remain Elusive 

“The changing distribution of workers might be able to explain up to one-half of the slowdown in labor productivity growth from 2.5% to 1.5% per year since the 1960s," said Dietrich Vollrath, a University of Houston economist. Indeed, this effect has accelerated since 2000, when workers, in aggregate, started to move from higher to lower productivity sectors. 
Services productivity, besides its natural disadvantage, may be facing an added headwind: The sector is absorbing millions of workers whose underlying skills may not be well suited to the jobs they take on. 
If people start doing work they are relatively good at, and if manufacturers shed their least efficient workers first, manufacturing productivity will improve as it downsizes but services-sector productivity will suffer as it absorbs workers who are a poor fit. (Sections in bold are mine).
All resources, including labor, are not "perfectly adaptable" to a alternative uses.  If you employ/deploy resources to such alternative uses they tend to be less productive, hence more costly.
Simple example.  The decline of steel manufacturing or coal production coincided with a increased demand for truck drivers.  While some unemployed steel workers/miners may make fine truck drivers, the "marginal" ones or additional ones after a certain critical mass, may not be so good. They may have more accidents or load mishaps and are more expensive (ceteris paribus) to employ.

I think this is an issue in many different industries/professions where there is a surge (short term or longer term) in demand for workers with certain skills.

It is discovering that point of inflection where the diminishing returns of labor start to turn negative and adding those workers becomes counter-productive. 

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