Robert Gordon has argued in his recent NBER paper “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” that growth rates have slowed and we are reverting to very low historical growth rates and indeed a period of economic stagnation. However, what I find intriguing is that an examination of some long-term data for Britain provides conflicting results that quite frankly puzzle me.
Greg Clark has constructed a long-term series for average annual real earnings in Britain stretching from 1209 to 2010. (See G. Clark, “What Were the British Earnings and Prices Then? (New Series)” Measuring Worth, 2011). As Figure 1 shows, there was a period of growth in average annual real earnings (2010 pounds) from about the early 1300s to the mid 1400s, followed by a long decline with growth not resuming until the advent of the industrial revolution after which real earnings have increased dramatically.
If one calculates and plots the the annual growth rates and then does a LOWESS smooth (0.8 bandwidth) on the growth rates, one obtains Figure 2a. Figure 2b plots only the LOWESS smooth and provides a much better picture of what the course of growth rates (in percent) for average annual real earnings have been. What is interesting about Figure 2b is that growth rates (in percent) for real average earnings in Britain have increased steadily since about the mid 1600s. Indeed, there appears to be no decline during the course of the twentieth century.
This is in contrast to the result you get when using growth rates for real per capita GDP. Lawrence Officer and Sam Williamson provide a real per capita GDP series for the UK for the period 1830 to 2010 (L.H. Officer and S.H. Williamson, “What Was the U.K. GDP Then?” Measuring Worth 2011). When the growth rates for real per capita GDP are calculated and a LOWESS smooth applied, you get the result that Robert Gordon has made the argument for. Growth rates for real per capita GDP in the UK rise from about the mid-19th century and peak after 1945 at about 2 percent and then begin to decline. Figure 3 takes the LOWESS smoothes for the growth rates for both average annual real earnings (1245-2010) and real per capita GDP (1831-2010) and plots them together.
This is a bit of a puzzle. The earnings growth rates show a pretty steady upward trend even into the present while real per capita GDP growth rates shows a decline setting in after the middle of the 20th century. Based on the earnings profile, it has been onward and upwards for the last 400 years and there does not yet seem to be an end in sight. Does earnings growth perhaps lag per capita GDP growth and decline is just around the corner? If so, why? Why is earnings growth so steady relative to per capita GDP growth? Is there a labor economist out there who might shed some light on this?