Division of Economics and Business Working Paper Series Cyclical and Secular Determinants of Productivity in the Copper, Aluminum, Iron Ore, and Coal Industries

Over the past decade both labor and multifactor productivity have fallen in copper, iron ore, coal, and many other mining operations, causing production costs to rise. This decline, following years of rising productivity, has led many to conclude that new technology can no longer offset the adverse effects of resource depletion. As a result, real mineral commodity prices will be permanently higher in the future. This article questions this hypothesis. It first provides a conceptual analysis that shows that much or perhaps even all of the recent drop in productivity could be due to the unanticipated growth in market demand and the sharp jump in prices it provoked. It then surveys a number of the available empirical studies of productivity trends. For copper, iron ore, and coal, it finds substantial support for the view that much of the recent drop in productivity can be attributed to higher prices. Aluminum on the other hand did not experience the same jump in real price over the 2000s. Nor did it suffer a significant drop in productivity. These findings have important implications. In particular, they suggest that new technology may well continue to offset most or all of the cost-increasing effects of resource depletion. If so, real commodity prices will be lower over the long run than many now assume. This possibility has important consequences for mineral producing firms making large investments in future capacity, for mineral producing countries dependent on revenues from mining, and for society as a whole in terms of the long-run availability of nonrenewable commodities and the future threat of mineral depletion. JEL classifications: L71, L72, O3, Q3, Q4