Even as the unemployment rate has fallen to the lowest level in years and the forecast for GDP growth is trending upwards, lackluster productivity growth is a brake on economic recovery. Understanding the recent productivity slowdown is crucial.
A better understanding could shed some light on what reforms might help reignite sluggish productivity growth, which is key to delivering better standards of living and a higher quality of life.
Although a raft of recent research documents the productivity slowdown, some suggest that it is fake news. The growing role of technological products on the overall economy could explain the slowdown if these new products are not properly measured. This possible mismeasurement has important implications even if it cannot explain away this productivity puzzle.
In a new working paper, authors David Byrne of the Federal Reserve Board, Stephen Oliner of the American Enterprise Institute, and Daniel Sichel of Wellesley College show that mismeasurement of the prices of these high-tech products leads to a substantial understatement of the extent to which these prices have declined. For example, the authors constructed a price index for the microprocessors (MPUs) used in desktop computers that better captures ongoing quality changes and evolution of price profiles over time.
Their preferred index fell at an average annual rate of 42 percent from 2009-2013, compared to an average decline of 6 percent in the Producer Price Index for microprocessors, the closest official comparison. This means that the official measures that show a relatively flat price profile are understating the actual fall in prices due to quality improvements in microprosessors that were not captured by those indices.
The same measurement problems at play for MPUs apply to other tech products, and in other papers some of the authors developed indexes for some of these products. With these adjustments, the authors find that from 2004-2015, the gap between the percent changes in the official measurement and the alternative index, ranged from 5 to almost 14 percentage points.
Source: Bryne, Oliner, and Sichel (2017).
While their adjustments do not fundamentally change the overall story of slowing productivity growth, they do alter the allocation of the growth that does exist. The tech sector has enjoyed much faster multi-factor productivity (MFP) growth than previously believed, implying that growth in non-tech sectors is slower than official measurements show.
Recently, MFP growth in the high-tech sector has remained robust while growth in other sectors has collapsed. The high-tech sector saw MFP growth of 10.9 percent from 2010-2015, while MFP was essentially unchanged for all other sectors over the period.
If MFP growth can be used as a proxy for innovation, the results from this paper imply that the pace of innovation in the technology sector has been faster than believed, while stagnation in other areas has been worse than the official statistics would imply.
Specifically, the technology sector has enjoyed a robust pace of innovation, but other spheres have stagnated more than previously believed. The confluence of these two developments with opposing effects might explain the lack of a substantial net effect on productivity growth, even if the real allocation substantially from the official statistics due to the mismeasurement of high tech prices.
The authors suggest that their observed pattern of multifactor productivity growth implies a looming second wave of productivity growth driven primarily by the technology sector and digital economy. They caution that it could take some time, and continued low investment could mitigate the magnitude of this wave.
Better measurement of technological products cannot explain away the problem of sluggish productivity growth, but it does give a different picture of where that growth is coming from, with the technology sector generating even more of the growth than the official measurements indicate. The healthy rate of innovation in the technology sphere could mean that faster productivity growth is coming.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes.
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