The Productivity Paradox

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The Productivity Paradox

• Erol Taymaz
• ECON 448

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The Paradox

• We Love Computers
• Computers (Seem To) Hamper Productivity we see
  computers everywhere but in the productivity
  statistics. (Solow-paradox)

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The Paradox
ICT investment
TFP growth
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Evidence of a Problem

• Productivity Growth Slump, 1973 - present

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Evidence of a Problem (part 2)
Value Added

• Productivity
• Downturn in Productivity Growth, not Productivity

Person-Hour Employed
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Evidence of a Problem (part 3)

• Massive Expenditures in Information Technology
• 43 of capital budgets on hardware alone
• Has Replaced Other Forms of Capital Investment
• but hasnt performed as well
• some studies show a zero return on investment for
  IT, vs. 13 for traditional investments

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Why (not)?

• Service Industries Output Hard to Quantify
• Banking labor output labor input
• Baily and Gordon attempted to correct for poor
  measurements, could only raise growth 0.2
• Unmeasured Value
• What if lots of value added with no dollar
  increase?
• Cars now have airbags, better emissions, antilock
  brakes...
• BLS figures uses strict dollar amounts

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Excuses

• Too early to tell Oliner and Sichel, 2000
• Computer Hardware is only 2-5 of capital stock
• Technology still immature
• Insufficiently trained workforce
• Major innovations (PCs, the Internet, etc) have
  been generated since the mid 1990s

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Other Explanations

• What we observe is substitution of IT for non-IT,
  there is no technical change Jorgenson and Yip,
  2001
• It is not a great innovation (compared to the
  early 20th century) Gordon, 2000

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Technical Change in IT
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Technical Change in IT
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ITs Share in Output Growth
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ITs Share in Output Growth
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ITs Share in Capital Input
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ITs Share in Capital Input
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Sources of US Growth
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Sources of US Growth
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Sources of Growth in DCs
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Substitution of IT for non-IT
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Growth Accounting

• Oliner and Sichel (2000)
• Growth accounting
• dY acdKc asdKs amdKm aodKo
• aL(dL dq) MFP

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Growth Accounting

• A sharp increase in MFP
• IT capital plays an important role both its use
  and production
• The impact will stay relatively strong for at
  least the next few years
• Its share increased, so does its effect

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• Does the New Economy Measure up to the Great
  Inventions of the Past?
• Gordon (2000)

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A New Growth Accounting
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Structural Acceleration in MFP
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Structural Acceleration in MFP

• The New Economy does not reach to other, non-IT
  sectors, that produce 80 of output.
• 1995-1999 is too short. The MFP growth may
  reflect cyclical effects.

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Questions?

• Why was growth so slow after 1972?
• Why was growth so fast during the Golden Years
  1913-1972?

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The Great Inventions of the 2nd IR

• Electricity
• Electric light and electric motor
• Electric chair
• EM revolutionized manufacturing
• New consumer goods
• Air conditioning

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The Great Inventions of the 2nd IR

• Internal combustion engine made possible personal
  autos
• ICE led to
• Suburbs
• Highways
• Supermarkets
• No rural isolation

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The Great Inventions of the 2nd IR

• Chemicals, plastics, and pharmaceuticals
• New materials
• Longer life expectancy
• 1900-1950, increased by 0.72 per year
• 1950-1995, increased by 0.24 per year

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The Great Inventions of the 2nd IR

• Entertainment, communication and information
• Telegraph (1844)
• Telephone (1876)
• Phonograph (1877)
• Popular photography (1880s)
• Radio (1899)
• Motion pictures (1880s)
• TV (1911)

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The Great Inventions of the 2nd IR

• Urban infrastructure
• Running water
• Indoor plumbing
• Urban sanitation

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The Great Inventions of the 2nd IR

• Would you like to live in a house without a flush
  toilet or the Internet?

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What about the future?

• Do we expect an increase in MFP as a result of
  the diffusion of the New Economy, the Internet,
  etc?
• No!

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Why not?

• Diminishing returns...
• We already received most of the benefits of
  these innovations.

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Then, why firms invest in IT?

• Market share protection (Barnes and Noble vs
  Amazon a zero-sum game)
• Recreation of old activities rather than creation
  of new activities (much internet content...)
• Duplication
• Use of business computers for consumption
  purposes