David Warsh writes about the development of productivity measures, what the measurements tell us about productivity in the past, and what we might expect in the future:
Fifty Years On, by David Warsh, Economic Principles: [In] 1957 ..., Robert Solow published “Technical Change and the Aggregate Production Function.” Ten years later, Dale Jorgenson and Zvi Griliches supplied theoretical foundations with “The Explanation of Productivity Change.”
Since then, growth accounting has turned into big business. ... The task ... is to understand the determinants of this elusive factor perhaps even learn to quicken its pace. For the rate of increase of productivity is vital to our well-being. If it grows quickly, we will be rich, able to make all kinds of accommodations with demographic swings and climate change; if it grows slowly, the necessary adjustments will be much more painful. ...
Since the measurement business began in earnest, there have been three distinct eras of US productivity: the long boom from 1948 to 1973, when output per hour worked (labor productivity) grew at an annual average of 3.3 percent; the mysterious twenty-year slowdown after 1973, when the rate slowed to an average of slightly less than 1.5 percent per year; and the unexpected resurgence after 1995, when the annual rate jumped up to 2.5 percent or more.
The period of the slowdown was confusing... Economists advanced all kinds of explanations: the sharp increase in energy prices; the rise of a service economy; the growth of government; a decline in R&D spending in the 1960s; the limits to growth having been reached. Others argued that the slower rate of the ’70s was the normal rate, that the rapid productivity growth after World War II had been artificially high.
Thus the resumption of the earlier trend, after 1995, caught researchers totally by surprise. Recently, Northwestern University’s Robert Gordon recalled the mood that prevailed in January 1998, when the American Economic Association met in Chicago on the eve of another year of meteoric ascent in the stock market...:
Everybody, including Jack Triplett [of the Brookings Institution, a celebrated growth accountant], not to mention me, was still talking about the Solow paradox [“You can see the computer age everywhere these days but in the productivity statistics.”] Nobody was talking about the productivity growth revival….
Yet Business Week had seen it coming in late 1995 [with a celebrated “New Economy” cover story], not to mention Alan Greenspan’s wise remarks in 1996... As late as June 1998…, I was still trying to argue that “there is something wrong with the computers.”
These perceptions totally changed between mid-’98 and mid-’99. Since then, the debate has been an opera of contending voices seeking to explain the change. Stephen Oliner and Daniel Sichel, both of the Federal Reserve Board, touched off the debate, asking in an important paper in 2000, “Is Information Technology the Story?”
Indeed it was, replied Dale Jorgenson, of Harvard University, and Kevin Stiroh, of the Federal Reserve Bank of New York, in their 2002 paper, “Raising the Speed Limit: US Economic Growth in the Economic Age.” Some 60 percent of the gain in productivity stemmed directly from information technology, they calculated.
By 2004, however, Triplett and Barry Bosworth, also of the Brookings Institution, identified a different source. The service industries airlines, broadcast, banking and the like -- had contributed much of the improvement, they argued.
All the while, Northwestern’s Gordon remained the leading techno-pessimist. The speedup was partly a cyclical phenomenon, he argued, partly a one-shot boost from improved Internet-computer communications. It would prove to be no more than a surge.
Last week, when many of the principals met in Cambridge at the National Bureau of Economic Research (NBER), there were more signs of convergence among those who looked to information technology and streamlined industrial structure to explain the productivity resurgence. Gordon, the pessimist, remained in the minority.
The stakes are high, of course. ... If Jorgenson and Stiroh are right, the US economy can grow at around 3 percent...; if Gordon is correct, the “speed-limit” of the economy is around 2.5 percent. ...
Meanwhile, attempts continue to decompose national income accounts and productivity calculations along different lines, in hopes of shedding more light on the issues. ...