A Productivity Problem

Source: Brookings, Mar 2016

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After 2004, measured growth in labor productivity and total-factor productivity (TFP) slowed. We find little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services.

First, mismeasurement of IT hardware is significant prior to the slowdown. Because the domestic production of these products has fallen, the quantitative effect on productivity was larger in the 1995-2004 period than since, despite mismeasurement worsening for some types of IT—so our adjustments make the slowdown in labor productivity worse. The effect on TFP is more muted.

Second, many of the tremendous consumer benefits from smartphones, Google searches, and Facebook are, conceptually, nonmarket: Consumers are more productive in using their nonmarket time to produce services they value. These benefits do not mean that market-sector production functions are shifting out more rapidly than measured, even if consumer welfare is rising.

Moreover, gains in non-market production appear too small to compensate for the loss in overall wellbeing from slower marketsector productivity growth.

Third, other measurement issues we can quantify (such as increasing globalization and fracking) are also quantitatively small relative to the slowdown. Finally, we suggest high-priority areas for future research

Related Resource: NBER, Feb 2016

The U.S. has been experiencing a slowdown in measured labor productivity growth since 2004. A number of commentators and researchers have suggested that this slowdown is at least in part illusory, because real output data have failed to capture the new and better products of the past decade. I conduct four disparate analyses, each of which offers empirical challenges to this “mismeasurement hypothesis.”

  1. First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries’ consumption or production intensities of information and communication technologies (ICTs, the type of goods most often cited as sources of mismeasurement).
  2. Second, estimates from the existing research literature of the surplus created by internet-linked digital technologies fall far short of the $2.7 trillion or more of “missing output” resulting from the productivity growth slowdown. The largest—by some distance—is less than one-third of the purportedly mismeasured GDP.
  3. Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs would have to have been multiples of their measured growth in the data.
  4. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high).

In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.

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