Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, May 5, 2022

AI Summary. Using international student and adult skills assessments to build a macroeconomic measure of human capital, the authors estimate that the stock of human capital is 3-4x more responsive to education quality than to years of schooling. The measure is correlated with productivity, though less so over time within OECD countries.

Balázs Égert, Christine de la Maisonneuve and David Turner OECD
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Education quality outweighs quantity for growth: PISA/PIAAC data shows 3-4x stronger elasticity vs years studied. Quality improvements drive productivity gains more than increased education years.

Does education quality matter more than years of schooling for human capital?

Core argument: The elasticity of the human capital stock with respect to education quality is 3–4 times larger than with respect to education quantity, according to a measure built from PISA and PIAAC surveys.

The new macroeconomic measure of human capital, utilizing PISA [Programme for International Student Assessment] and PIAAC [Programme for the International Assessment of Adult Competencies] surveys, reveals that the elasticity of human capital stock with respect to education quality is 3-4 times larger than for education quantity. This measure, a cohort-weighted average of past PISA scores and mean years of schooling, shows a strong link to productivity, suggesting that improvements in education quality could yield significant productivity gains. Among 53 OECD and non-OECD countries, Australia, Japan, and Finland rank highest in human capital, while Chile and Thailand rank lowest. The correlation between human capital and productivity is evident, although less pronounced over time within OECD countries. The findings highlight the potential for education policy reforms to enhance human capital and drive economic growth, with the impact of quality improvements being more substantial than quantity increases.

Takeaways by Macro Roundup® AI

  1. The elasticity of the human capital stock with respect to education quality is 3–4 times larger than with respect to education quantity, according to a measure built from PISA and PIAAC surveys.
  2. The measure, a cohort-weighted average of past PISA scores and mean years of schooling, correlates strongly with productivity, though less markedly over time within OECD countries.
  3. Among 53 OECD and non-OECD countries, Australia, Japan, and Finland rank highest in human capital, while Chile and Thailand rank lowest.

“….This paper provides a new measure of human capital using PISA and PIAAC surveys, and mean years of schooling. The new measure is a cohort-weighted average of past PISA scores (representing the quality of education) of the working age population and the corresponding mean years of schooling (representing the quantity of education). In contrast to the existing literature, the relative weights of each component are not imposed or calibrated but directly estimated. The paper finds that the elasticity of the stock of human capital with respect to the quality of education is three to four times larger than for the quantity of education. The new measure has a strong link to productivity with the potential for productivity gains being much greater from improvements in the quality than quantity component of human capital. The magnitude of these potential gains in MFP is comparable to a similarly standardised improvement in product market regulation, but the effects materialise with much longer lags. The paper demonstrates through the example of pre-primary education, how to simulate the impact of a particular reform to education policy on human capital and productivity….”

Balázs Égert, Christine de la Maisonneuve and David Turner, "A new macroeconomic measure of human capital exploiting PISA and PIAAC: Linking education policies to productivity,"OECD, April 2022, https://www.oecd-ilibrary.org/docserver/a1046e2e-en.pdf

“.. The newly constructed stock of human capital appears to be positively correlated with productivity for a cross-section of 53 OECD and non-OECD countries (Figure 5, Panel A), although this is somewhat less apparent when comparing time series observations for just OECD countries (Figure 5, Panel B).The strength of the correlation is better assessed through the estimation of an empirical relationship linking multifactor productivity to human capital, controlling for other determinants…”

Relationship Btw Measure Of Human Capital And Productivity

“…. The new measure of human capital for the population aged 16 to 65 years suggests that the countries with the greatest human capital include Australia, Japan and Finland, while Chile and Thailand have the lowest levels of human capital among this group of 16 countries (Figure 4, Panel A).These rankings for the last available year are broadly confirmed for the stock covering the population aged 16-39 (Figure 4, Panel B), although there are some differences suggesting that younger generations have been increasingly better educated in some countries than in others.For instance, Finland lags behind Japan for the total stock, but the countries flip places for the stock covering only the younger generations, because the stock of human capital of younger generations has risen more strongly in Finland compared to Japan. More generally, an ageing population might act as a drag on total human capital because of their typically lower student test scores and a lower number of years spent in education and also because of the declining pass-through from student test scores to adult test scores(as represented by the coefficient estimates of𝜎 and𝜃 in Table 4)…”

“….For the countries for which bot…can be calculated, the two measures show a high correlation (Figure 2)…”

“..To capture quantity aspects, mean years of schooling (MYS) are added, on top of the student test scores, as an explanatory variable to the adult test score regressions…”

Cutting in “Quantity” Of Education

“..An increase in the years spent in the education system boost adult test scores in a statistically significant manner (Table 4, equations and ), although contrary to student test scores, the positive effect of mean years of schooling on adult test scores does not decline for older cohorts. The elasticity of cohort-specific adult skills with respect to student test scores is three to four times higher than the elasticity with respect to mean years of schooling. This result can be contrasted with the measures of learning adjusted years of schooling, which have been used in the literature but by construction usually impose the same elasticity for the quantity and quality components.Furthermore, this result can be used to combine the quality and quantity measures of education in a single stock measure of human capital…”

Regression Results

“…A building block of the new measure of human capital is establishing a link between PIAAC adult test scores and student test scores of the corresponding cohort who took the student tests as 15-year olds. Such matching is reasonable given that both sets of tests capture similar skills: student test scores cover reading, maths and science; PIAAC adult test scores cover literacy, numeracy and problem solving. The three components of both student and adult test scores are highly correlated with one another. Hence, an average of the three components can be conveniently used as a summary measure for student and adult test scores, respectively….”

Matching PIAAC and PISA scores by cohort

Steve Comment: “…Read the underlying OECD report the blog post was based on, in terms of your question about what they meant by“…PIAAC test scores are regressed on matched PISA test scores and mean years of schooling. The estimation results show that the elasticity of the stock of human capital with respect to the quality of education is three to four times larger than for the quantity of education…”in their blog post (Note here STS is their “Transformed Student Test Score Series”)To capture quantity aspects, mean years of schooling (MYS) are added, on top of the student test scores,as an explanatory variable to the adult test score regressionswhere…. is mean years of schooling, all indexed by cohort c and country i, ensuring that the MYS data matches the same cohort for which the adult test scores are available. An increase in the years spent in the education system boost adult test scores in a statistically significant manner (Table 4, equations and ),although contrary to student test scores, the positive effect of mean years of schooling on adult test scores does not decline for older cohorts. The elasticity of cohort-specific adult skills with respect to student test scores is three to four times higher than the elasticity with respect to mean years of schooling.This result can be contrasted with the measures of learning adjusted years of schooling, which have been used in the literature but by construction usually impose the same elasticity for the quantity and quality components. Furthermore, this result can be used to combine the quality and quantity measures of education in a single stock measure of human capital…”…”

Monday, May 9, 2022

AI Summary. Total factor productivity in the US non-farm business sector rose 3.2%, the largest annual gain since 1983, but productivity figures remain volatile. One quarter recorded a 7.5% annualized drop in non-farm business productivity — the steepest quarterly decline in 75 years — as output fell 2.4% and hours worked rose 5.5%, lifting unit labor costs 11.6%.

James Pethokoukis American Enterprise Institute
Date Posted:
Is Database:
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US productivity shows historic volatility: TFP surges +3.2% (2021 best since 1983) then plunges -7.5% Q1’22 (75yr record drop). Unit labor costs spike +11.6% as output falls -2.4%

Is US productivity growth improving or just increasingly volatile?

Core argument: US non-farm business total factor productivity rose 3.2% in 2021, the largest increase since 1983, capturing growth not explained by labor or capital inputs.

In 2021, the US non-farm business sector saw a significant increase in total factor productivity (TFP), rising by 3.2%, marking the largest growth since 1983. TFP, which accounts for economic growth not explained by labor or capital inputs, reflects advancements in production technologies and processes. Despite this positive development, productivity numbers remain volatile, with a sharp 7.5% annualized decline in non-farm business productivity reported in Q1 2022, the steepest quarterly drop in 75 years. This decline was driven by a 2.4% decrease in output and a 5.5% increase in hours worked, leading to an 11.6% surge in unit labor costs. While pandemic-related shifts like remote work and increased capex have not significantly boosted labor productivity, ongoing economic recovery and labor market tightening may moderate productivity trends and firm unit labor costs.

Takeaways by Macro Roundup® AI

  1. US non-farm business total factor productivity rose 3.2% in 2021, the largest increase since 1983, capturing growth not explained by labor or capital inputs.
  2. Non-farm business productivity fell at a 7.5% annualized rate in the first quarter of 2022, the steepest quarterly drop in 75 years, as output declined 2.4% while hours worked rose 5.5%, pushing unit labor costs up 11.6%.
  3. Pandemic-related shifts including remote work and higher capital expenditure have not significantly boosted US labor productivity, though continued economic recovery and labor market tightening may moderate productivity trends and firm unit labor costs.

In March, the Labor Department reported that total factor productivity, or TFP, in the private nonfarm business sector increased 3.2 percent in 2021. That was the largest growth since 1983.The below chart comes from the San Francisco Fed, and includes a modified TFP measure that attempts to smooth out business cycle noisiness.

James Pethokoukis, "Good News, Bad News on US Productivity Growth,"American Enterprise Institute, May 6, 2022, https://www.aei.org/economics/good-news-bad-news-on-us-productivity-growth/

Good News, Bad News on US Productivity Growth

I only wish US productivity growth were as consistently strong as job growth. (The economy added 428,000 jobs in April, making it 12 consecutive months of employers adding at least 400,000 new jobs.) On Thursday, the Labor Department reported that non-farm business productivity fell at a 7.5 percent annualized pace, the sharpest quarterly decline in 75 years. “The mother of all productivity declines,” is how Capital Economics described it.

Of course, productivity numbers are famously volatile, and that seems to be especially true during this pandemic era. Then again, it’s not the first lousy number. From a CE research note:

is now up only 2.6% since the fourth quarter of 2019, which translates into an annualized pace of little more than 1%. Pandemic-related shifts like working from home and increased capex provided no meaningful boost to labor productivity.

And here’s JPMorgan’s take (bold by me):

Nonfarm productivity dropped 7.5% saar in 1Q on the combination of a 2.4% decline in output and a 5.5% increase in hours worked. Unit labor costs, meanwhile, surged 11.6% saar in 1Q. These 1Q figures were very close to our expectations, but the productivity reading disappointed the consensus and the unit labor costs figure beat the consensus forecast. The data can be choppy, and the 1Q swings likely are not fully indicative of the underlying trend. But as the recovery continues and the labor market keeps tightening, we think that the trend in productivity will moderate and the trend in unit labor costs will firm and these expectations have been broadly playing out through some of the noise in the quarterly readings.

Of course, I hope that we see rapid productivity growth, not just moderation in the current trend. This would be due to pandemic-related trends such as work-from-home and more e-commerce, but also greater diffusion of AI into the economy and perhaps a pro-productivity boost from the 2021 infrastructure bill.

And not all the news is bad. In March, the Labor Department reported that total factor productivity, or TFP, in the private nonfarm business sector increased 3.2 percent in 2021. That was the largest growth since 1983. (TFP is that part of economic growth that can’t be explained by production inputs, such as the number of hours worked or the amount of capital used. This unexplained bit presumably reflects advances in production technologies and processes.) The below chart comes from the San Francisco Fed, and includes a modified TFP measure that attempts to smooth out business cycle noisiness.