Academic journal article Federal Reserve Bank of St. Louis Review

Where's the Productivity Growth (from the Information Technology Revolution)?

Academic journal article Federal Reserve Bank of St. Louis Review

Where's the Productivity Growth (from the Information Technology Revolution)?

Article excerpt

Gutenberg invented movable type. It took another 40 years for an entrepreneur named Aldus to assemble what created book publishing as we know it. Marconi invented radio exactly 100 years ago. It took another 25 years for entrepreneurs in Pittsburgh and New York to create broadcasting. It was through broadcasting that radio reshaped our lives.

Scott Cook, Chairman, Intuit Forbes ASAP, October 9, 1995

Technology - especially information technology (1T) - has demonstrated phenomenal growth over the last few decades, while the growth of business-sector productivity in the United States has been relatively modest, seeming to belie the much-ballyhooed information technology revolution. If computer usage has exploded so dramatically, and if computers contribute to increased efficiency, some people are asking, where is the associated productivity growth? There are actually two parts to the question. First, are IT investments improving productivity? Second, if they are, why don't the aggregate numbers reflect this? The essence of this puzzle is captured by Robert Solow's quip that computers are everywhere "except in the productivity statistics."

Solow's observation produced a spate of research to explain this apparent puzzle. Three explanations coming out of this research will be discussed in this article: measurement difficulties, the small proportion of capital stock that computers represent, and the concept that diffusion of changing work methods is still under way.

The following section shows some of the trends in investment in IT and the corresponding trends in output per hour for total business and manufacturing. It then looks at some selected industries to see if the IT/productivity growth nexus exists at this level of aggregation. The next section analyzes the three explanations offered for the apparent puzzle. The fourth section offers some tentative predictions for when the latent productivity will begin to have an impact on the statistics. Finally, I offer some conclusions about the relation between information technology and productivity growth.

INVESTMENT AND PRODUCTIVITY TRENDS

The proliferation of cellular phones, pagers, and desktop and laptop computers in the last few years provides some very obvious examples of the rapid advances in information technology over the last two decades. Investment statistics also bear out the increases in IT usage. Table 1 shows (1) the total private nonresidential fixed investment (PNFI) in chain-weighted 1992 dollars, (2) the share of this investment attributable to producers' durable equipment (PDE), (3) the information-processing and related equipment component of this share, and (4) the portion of this component made up of computers and peripheral equipment.

The portion of computers in total nonresidential fixed investment increased from less than one-tenth of 1 percent of total PNFI in 1970 to 12.8 percent by 1995. During this period, information processing equipment increased from 7.2 percent of [TABULAR DATA FOR TABLE 1 OMITTED] PDE in 1970 to 37.6 percent by the end of 1995. Expressed another way, investment in information processing equipment increased more than 1800 percent, while total PNFI increased about 250 percent. Figure 1 shows quarterly data for each of these components over the period. The accelerated growth over the last decade is obvious.

By comparison, productivity growth measures were more meager. Table 2 shows productivity growth rates for total business, the nonfarm business sector, the manufacturing sector, and the durable goods manufacturing sector. Whereas investment in information processing equipment grew at an annual rate of 12.5 percent over the period, productivity gains ranged from 1.3 annually for nonfarm business to 3.3 percent annually for manufacturing durables. Figure 2 shows that manufacturing productivity has trended up more steeply in the last few years, but when it is aggregated with nonmanufacturing productivity, the total is less impressive. …

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