Understanding the Growth Slowdown by Lindsey Brink;

Author:Lindsey, Brink;
Language: eng
Format: epub
Tags: ebook
Publisher: Cato Institute
Published: 2015-12-01T00:00:00+00:00

6. Information Technology and Productivity Growth

Stephen D. Oliner1

Introduction

The rate of increase in labor productivity in the United States slowed sharply around 2004, after having surged for roughly a decade. A substantial body of research (see, for example, Oliner, Sichel, and Stiroh 2007) has concluded that the productivity boom from the mid-1990s to 2004 reflected a huge step-up in the growth contribution from information technology (IT).

Important questions remain, however, concerning both the more recent history and the outlook for IT and productivity growth. Is the return to slower productivity gains after 2004 linked to IT? Has innovation in the semiconductor sector—the engine that powers the development and diffusion of advances in IT—begun to stall out? And, finally, what are the prospects for a return to faster productivity growth? Views about the future range from the pessimism expressed by Robert Gordon (see Gordon, 2012, 2014a, and 2014b) to the much brighter outlook envisioned by Erik Brynjolfsson and Andrew McAfee (2014).

This paper addresses all three questions, drawing heavily on research with David Byrne and Daniel Sichel.2 Our research shows that the return to slower productivity gains roughly a decade ago was indeed linked to IT, which has been providing much less impetus to growth than in the prior decade. At the same time, semiconductor technology has continued to advance, and chip prices have continued to drop at a rapid pace, contrary to the picture painted by the official price data. Thus, the underlying force that would be needed to power a second IT-centric productivity wave remains intact. That said, the outlook for productivity growth over the coming decade is cloudy. Economists have a terrible track record when it comes to forecasting productivity growth, and confident predictions should be regarded with considerable skepticism.

Productivity Growth and Information Technology: A Look Backward

Reasonably consistent data on output per hour worked in the United States go back to 1889. Since then, output per hour has increased about 2.25 percent per year on average. Compounded over a period of 125 years, this average annual rise cumulates to roughly a 15-fold increase in labor productivity, generating a huge improvement in living standards.

Viewed against this long historical record, the recent performance of productivity has been lackluster. Figure 6.1 plots the data for output per hour worked in the nonfarm-business sector from 1974 to 2012, broken into three periods: 1974–95, 1995–2004, and 2004–12. During the first period, output per hour grew at an average annual rate of about 1.5 percent, well below the long-term average pace of 2.25 percent. Productivity growth strengthened from 1995 to 2004, rising about 3 percent per year. But since 2004, the trend increase in output per hour has returned to the slow pace recorded from 1974 to 1995. Notably, this slowdown predated the onset of the financial crisis. Thus, while the dislocations produced by the crisis may have damped the gains in productivity, they are not the root cause of the slowdown.3

Figure 6.1

REAL OUTPUT PER HOUR IN THE NONFARM-BUSINESS SECTOR

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