In 1987 economist Robert Solow famously said that the computer age was everywhere except for the productivity statistics. Despite the tremendous investments in quite noticeable technological breakthroughs since then, productivity growth in many G20 countries has been sluggish for some time.
Research from the University of Chicago suggests that the official productivity stats may be significantly under-reporting the true state of affairs. Indeed, the authors argue that real productivity growth since the start of the information age could be twice as high as we previously thought.
“Productivity growth is arguably the most important engine of growth in developed economies and most of the new technologies in recent decades are argued to be strongly factor-biased,” the authors explain. “In this paper we show, theoretically and empirically, that standard methods give downward biased estimates of growth in aggregate TFP in the presence of factor-biased technical change.”
Under-reported growth
The authors argue that digital technology has certainly led to productivity growth, but mismeasurement may not be capturing those gains successfully. They also suggest that these gains are not spread evenly across the economy, whether by country, industry, occupation, or even skill level.
“Conventional measures of productivity growth fail to fully account for this, leading to mistaken conclusions about the benefits of adopting new technology,” the authors explain.
The new framework developed by the researchers overcomes this bias and better captures factor-biased components of new technologies. This creates a significantly different picture of productivity growth, especially after 2000, which the researchers believe goes a long way towards explaining the supposed slowdown in productivity growth between 2000 and 2010, when internet technologies were booming.
Indeed, the new method suggests that productivity stats are likely to have under-reported the true state of affairs by up to 20%, with this especially likely during the dot-com era. As an example, the researchers cite the rollout of broadband internet across Norway between 2001 and 2007, which didn’t produce any productivity gains according to official figures. By using the new method, however, the rollout increased productivity among Norwegian companies by 3.5%.
“In both applications, we find that the factor-biased nature of technological progress, if ignored, leads to the erroneous conclusion of only modest productivity gains from adopting new technology when the actual gains are in fact considerable,” the authors conclude.
