Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

The IT Revolution: Is It Evident in the Productivity Numbers?

Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

The IT Revolution: Is It Evident in the Productivity Numbers?

Article excerpt

There is little doubt that we are witnessing a technological revolution. The question is, does this technological revolution have revolutionary economic consequences? In particular, is economic productivity growing at a much faster rate today, and if so, will it continue to do so in the future? In this article, we review recent literature on the measurement of productivity growth in the United States. We find considerable evidence that the internet technology (IT) revolution has had an impact on productivity.

In order to understand the effects of IT on today's economy, one should look at the past century. When we consider postwar U.S. productivity movements, two events stand out: the impressive productivity growth performance from the end of World War II up to the early seventies, and the ensuing productivity slowdown, which lasted until the mid-nineties. Labor productivity growth, which averaged about 2 percent per year from the fifties on, suddenly decreased to nearly 0 percent, and then seemed to settle at a rate around 1 percent. Moreover, this postwar productivity pattern is observed not only for the U.S. but throughout the western world.

This productivity slowdown remains quite poorly understood (for an overview and detailed data, see Hornstein and Krusell [1996]). One interpretation of the productivity data is that the fast postwar growth was a transitional period that made up for the losses during the Great Depression, and the post1974 period of low productivity growth rates is really the normal state of the economy. We are not convinced that this view is correct. From our perspective, the productivity slowdown is interesting because it occurred at the same time that IT applications became more widespread in the economy. The paradox is that new technology developments since that time have been associated with a productivity slowdown, and not an upturn, at least until quite recently. In other words, economists have had legitimate reasons to challenge those talking about a technology revolution on economic grounds: for it to have had significance, productivity growth (or economic welfare measured in some other way) ought to have gone up.

This article points to a number of reasons why the technology revolution may have had a significant impact on the economy's production structure despite its apparent insignificance in aggregate productivity statistics. First, we emphasize a number of methodological issues that may have prevented standard accounting procedures from detecting increases in productivity. Second, we take the view that the technology revolution may have affected the production structure in a quite asymmetric form, mainly showing its economic impact through changes in relative prices. Given this view, we investigate the hypothesis that the technology revolution, after all, has had important consequences on productivity: (1) it has led to radical changes in productivity among different sectors/factors of production; and (2) a number of factors related to the technology developments themselves have resulted in measures of aggregate performance that do not accurately reflect the (positive) effects on the economy. We find that while there is some support for this hypothesis, the evidence is not conclusive.

In Section 1 we review recent methodological and measurement advances in standard growth accounting, also known as "total factor productivity" accounting, which uses some basic economic theory to account for changes in productivity. The central question is the extent to which we have been, and are still, witnessing a technology revolution that has a large impact on the productivity of our economies. The IT boom has radical implications not just as an example of rapid structural change, but also from a measurement perspective. In particular, it seems to have brought about, and promises to bring many more, large changes in a range of products used as both inputs and outputs. Existing measurement methods may quickly become obsolete as products change and new products are introduced, and substantial work to improve these methods, both theoretically and with new forms of data collection, becomes of first-order importance. …

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