Where Has Productivity Growth Gone?

Then, why is productivity stalling—in the US and all over the world?

Nobody knows. But, the truth of the matter is that technology improvement has completely failed in the last four decades to produce any significant acceleration in productivity. Actually, it has had the opposite effect. The advent of the computer in the seventies and eighties actually prompted a productivity slowdown. In 1987, Nobel Laureate Robert Solow famously declared: “You can see the computer age everywhere but on the productivity statistics.” And Solow must be good at discovering things. Let’s not forget his famous quip at Milton Friedman: “Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.”

Solow’s remark (on productivity, not on sex) triggered Eric Brynjolfsson’s  productivity paradox in 1999. But, by then, voila! Productivity growth started to rise. The explanation seemed to be obvious—it had taken longer than expected, but computers, with the support of the internet, were changing the economy. Finally, the technology revolution had arrived.

Alas, in 2005, after a mere decade of acceleration, productivity started to slow down in the U.S. Since then, it has been consistently down. This happened simultaneously to the Industrial Internet praised by General Electric’s CEO Jeff Immelt; the social network proliferation; the smartphone; and tablets, to name a few. In 2008, US productivity grew by a meager 0.8%; in 2011, by 0.5%; and, in 2012, by 1.5%. The first three quarters of 2013 show a 1% expansion.  This is very far from the 2.6% historical average.

Further, the trend is propagating to emerging markets. The Conference Board, the think thank of the big US firms, has just produced a survey that shows productivity growth falling among developing countries. The drop is particularly serious in Latin America, where The Conference Board talks of a serious slowdown, but affects virtually every emerging market with the exception of Africa (which is not to say much, since its productivity is just 5% of America’s).

Why is this productivity slump happening now? Explanations abound, but there is no agreement. Robert Gordon, from Northwestern University, posits that the internet, in spite of its visibility, is actually affecting just a fraction of the economy; Tyler Cowen, from George Mason University, concurs. Others, however, blame it to lack of demand—if there is no appetite for buying things, production will have to slow down. That last idea is somewhat connected to Lawrence Summers’ call for new monetary stimulus.

Whatever the reason, an economy with less productivity growth implies an economy where producing stuff does not become cheaper and, therefore, an economy with higher interest rates that, ultimately, hamper economic growth. The fact that the smartphone has not delivered more productivity is worrisome.


About the Author

Pablo Pardo
Pablo Pardo is Washington DC correspondent of El Mundo. Journalist especialized in International Economics and Politics.

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