The Productivity Boom Is Just Warming Up

The American economy is beginning to pick up steam, with growth of annualized gross domestic product in the second quarter of 3.3% and a continuing boom in productivity. The evidence on productivity is particularly important since growth in technology and productivity are the most significant determinants of improvements in the standard of living.

After bumping along at a rather slow pace in the latter half of the 1970s and '80s, productivity began to rise more rapidly in the mid-'90s. Output per worker increased at the rate of 2.5% per year from 1995 to 2000, and total factor productivity -- which measures output relative to the amount of capital as well as labor -- also grew at a fast clip.

In the past, productivity almost always fell during recessions because both labor and capital were underutilized as output sagged or grew more slowly. But the apparent paradox of the past few years is that labor productivity has grown even more rapidly since 2000 than in the '90s, at a 3.4% clip. This occurred despite the recession that started in March, 2001, and a slow recovery since the recession ended in November of the same year.

The large spurt in technological progress during the past eight years is mainly due to a series of developments: rapid progress in computer capabilities, the explosive growth of the Internet, advances in cellular and other wireless technologies, the growth of fiber optics, advances in biotech, greater world competition for U.S. companies -- which induced improvements in business efficiency -- and myriad other smaller improvements in technology.

THE IMPACT OF SOME of these events cannot yet be quantified, but the importance of information technology is documented by several statistics. During the boom years from 1995 to 2000, almost all of the improvements in productivity were due either to investments in information technology or advances in the output of information-technology goods. However, the productivity gains of the past several years are much less dependent on IT and are more widespread in the economy.

I continue to believe that even after the burst of the bubble in high-tech stocks, the U.S. economy is in the relatively early stages of a major technological revolution. The previous tech advance started at the end of the 19th century and was due mainly to the development of both the electric motor and the internal-combustion engine. It took 40 to 60 years for that revolution to be fully reflected in productivity improvement. The recent speedup in productivity growth suggests that the IT revolution is progressing along similar lines. If so, prospects are excellent for long-term growth in output per worker at a rate of 3% per year or higher for perhaps decades. Income per worker could double in 25 years or less.

Some economists have blamed much of the apparent decline in employment since the onset of the recession on the rapid improvement in technology. In a mechanical sense, that is a plausible view: If the growth in output is fixed, employment could fall if labor productivity improves a lot.

But the growth in output is not fixed. During the boom after 1995, employment grew rapidly alongside productivity. Rapid advances in both employment and productivity indicated that output also grew substantially. In the longer run, employment tends to grow at about the same rate as the increase in the labor force, even when productivity is advancing rapidly.

Moreover, there is controversy over what has been happening to employment, with two government surveys giving very different pictures of the changes in employment during this recovery. The data usually cited come from surveys of company payrolls, and these show rather large declines in employment since the start of the recession. However, the Labor Dept. also asks households about employment, and this shows a rise in employment during this time. These surveys sometimes give conflicting pictures partly because the household survey more quickly detects employment at new companies. It is possible that the number of new companies grew significantly during this recovery.

The relatively high unemployment rate and apparent decline in employment gets most of the media and political attention. But the most significant news from the past few years is the continuation and possible acceleration of the sizable productivity advance that began almost a decade ago.

By Gary S. Becker

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