As money growth slows, so does inflation
In November, I wrote: The relationships above give us a good basis to speculate on where inflation might be headed. The answer is ‘down’, and, perhaps, reasonably sharply. Today, the Bureau…
Three things are essential for economic growth: an increase in labor (number of hours worked), an increase in capital, and an increase in total factor productivity, which can be understood as an improvement in how efficiently inputs can be transformed into outputs. Growth in total factor productivity usually results from technological advancement and innovation.
Generally, there is a limit to how much increasing labor and capital can lead to growth. Labor and capital both suffer from diminishing marginal returns. This means that while increasing labor increases output, at some point, working more does not produce much additional output. The same is true for capital. Adding capital does not perpetually increase productivity. At a certain point, each additional investment in the capital will produce less output than the previous one.
What is then essential for sustainable long-term growth is increasing productivity, as American Experiment research has pointed out.
One of the ways through which we increase productivity, specifically in labor, is by improving human capital. This can be done by acquiring skills, either through education or training. Highly educated individuals with unique skills and technical know-how generally are more productive than low-educated, and thereby low-skilled, individuals.
Consequently, these differences in productivity then result in differences in wages. In the labor market, high-productive workers — usually highly educated — are usually paid more than low-productive — usually less educated — workers. Getting educated is, thereby, one of the ways through which individuals can earn more money.
This phenomenon has specific implications, especially in regard to educational attainment or factors that hamper it. During the pandemic, for example, public schools were closed, with some conducting only online classes for an extended period. This led to learning losses shown through lower test scores. These learning losses have significant implications for human capital and lifetime earnings.
What are these long-term implications?
Many studies have already shown that by disrupting human capital accumulation, school closures will lead to lifetime earnings loss among affected students. This is because temporal earning losses often translate to dropouts or lower skill accumulation over time, leading to less productivity, and therefore less pay. One study, for example, estimated that extending school closures — which started in Spring 2020 — to fall 2020, would translate to a $30,000 loss in earnings per decade per student who graduated high school but did not attend college.
New evidence from a recently released study by the NBER echoes these findings. But in addition to estimating earnings losses from learning loss, the authors also estimate other effects of learning loss on socioeconomic factors, like teenage pregnancy and criminal behavior.
By utilizing past data, the authors of this study did note that rising test scores have usually been associated with rising incomes and improvements in educational attainment. Additionally, rising test scores have also led to declines in unemployment, teen motherhood, as well as incarcerations, and arrests.
The authors then contend that by the same logic, declining test scores should lead to the opposite effect. Specifically, the authors estimate that
the recent decline would represent a 1.6 percent decline in present value of lifetime
earnings, as well as a decline in high school graduation and increase in teen motherhood, incarceration rates and arrest rates– if it were to become permanent. When spread across the 48 million public school students in the U.S. the estimated loss would total nearly $1 trillion.
Unfortunately, this is just more evidence of the damage unleashed by school closures.
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