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The Productivity Paradox

The Productivity Paradox. Erol Taymaz ECON 448. The Paradox. We Love Computers Computers (Seem To) Hamper Productivity : “ we see computers everywhere but in the productivity statistics .” (Solow -paradox ). The Paradox. ICT investment. TFP growth. Evidence of a Problem.

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The Productivity Paradox

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  1. The Productivity Paradox Erol Taymaz ECON 448

  2. The Paradox • We Love Computers • Computers (Seem To) Hamper Productivity: “we see computers everywhere but in the productivity statistics.” (Solow-paradox)

  3. The Paradox ICT investment TFP growth

  4. Evidence of a Problem Productivity Growth Slump, 1973 - present

  5. Evidence of a Problem (part 2) • Productivity = • Downturn in Productivity Growth, not Productivity Value Added Person-Hour Employed

  6. 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 hasn’t performed as well • some studies show a zero return on investment for IT, vs. ~13% for traditional investments

  7. 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

  8. 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

  9. 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]

  10. Technical Change in IT

  11. Technical Change in IT

  12. IT’s Share in Output Growth

  13. IT’s Share in Output Growth

  14. IT’s Share in Capital Input

  15. IT’s Share in Capital Input

  16. Sources of US Growth

  17. Sources of US Growth

  18. Sources of Growth in DCs

  19. Substitution of IT for non-IT

  20. Growth Accounting • Oliner and Sichel (2000) • Growth accounting dY = acdKc + asdKs + amdKm + aodKo + aL(dL + dq) + MFP

  21. 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

  22. Does the “New Economy” Measure up to the Great Inventions of the Past? Gordon (2000)

  23. A New Growth Accounting

  24. Structural Acceleration in MFP

  25. 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.

  26. Questions? • Why was growth so slow after 1972? • Why was growth so fast during the “Golden Years” 1913-1972?

  27. The Great Inventions of the 2nd IR • Electricity • Electric light and electric motor • Electric chair EM revolutionized manufacturing • New consumer goods • Air conditioning

  28. The Great Inventions of the 2nd IR • Internal combustion engine made possible personal autos ICE led to • Suburbs • Highways • Supermarkets • No rural isolation

  29. 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

  30. 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)

  31. The Great Inventions of the 2nd IR • Urban infrastructure • Running water • Indoor plumbing • Urban sanitation

  32. The Great Inventions of the 2nd IR • Would you like to live in a house without a flush toilet or the Internet?

  33. 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!

  34. Why not? • Diminishing returns... We already received most of the benefits of these innovations.

  35. 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

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