Sunday, March 6, 2016

054. US Productivity Has Slowed Down Despite the Computerization of the Economy

The U.S. has been experiencing a slowdown in measured labor productivity growth since 2004 to current date (2015).

The United States is experiencing a slowdown in measured labor productivity growth. From 2005 through 2015(Q3), labor productivity growth has averaged 1.3% per year. This is down from a trajectory of 2.8% average annual growth sustained over 1995-2004. The slowdown started before the onset of the Great Recession and is not tied to “bubble economy” phenomena in housing or finance. This slowdown is tied to a reversal of the productivity accelerations in the manufacturing and utilization of information and communication technologies (ICTs) that drove the 1995-2004 pace. One should therefore not expect measured labor productivity in the U.S. to naturally emerge as a consequence of emerging from the Great Recession. Labor productivity growth averaged 2.7% per year from 1947-1973, it fell to 1.5% per year over 1974-1994.

It has been suggested that current productivity metrics do not apply. In fact, the productivity numbers are now generally accepted and should be considered when a discussion of the impact of "digitization" takes place. The rationale is as follows:

The output of all global economies is measured exclusively in terms of GNP dollars. The input is measured exclusively in terms of dollars paid to producers, which includes labor costs.  Productivity is a ratio that measures the worth of inputs - dollar value of goods and services, which includes payment for knowledge-based costs - divided by the dollar worth of inputs. The inputs are always total factor productivity measurements that includes current costs plus the costs of capital. GNP is a ratio of the total output of an economy divided by the total dollar worth of inputs that supports the wealth of an economy .

US productivity numbers are down because the growth of GNP has slowed down (see below), the workforce participation has shrunk, output gains of corporations have been declining, the size of government has increased, etc (have a long list). The current metrics indicated that a great shift from labor inputs to capital inputs is now taking place under the label of digitization. IT budget used to be >60% labor and <40% capital. As customers transfer a larger share of their budget to "cloud" computing, the budget looks more like <50% labor and >40% capital. Moving into cloud computing reduces expensive labor costs and moves a large part of digitization programming offshore. Digitization substitutes inexpensive (e.g. efficient) capital costs as a contribution to GNP. Therefore "digitization" could be seen as one of the sources for the reduction in overall US productivity.

CONCLUSIONS: The current productivity slowdown is real. Whether that slowdown will end anytime soon is an open question. However, there is no evidence as yet that the “digitization” of the economy may result in an increase in productivity. A contrary trend may apply.

SOURCE: Challenges to Mis-measurement Explanations for the U.S. Productivity Slowdown, Chad Syverson, University of Chicago,  NBER Working Paper No. 21974,  February 2016

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