Productivity slowdown in US is all too real

American middle-class wages haven't been rising as rapidly as they once were, and a slowdown in productivity growth is probably an important cause.

In mature economies, higher productivity typically is required for sustained increases in living standards, but the productivity numbers in the United States have been mediocre. Labour productivity has been growing at an average of only 1.3 per cent annually since the start of 2005, compared with 2.8 per cent annually in the preceding 10 years. Without somehow improving productivity growth, living standards will continue to lag, this widely held narrative concludes.

Still, not everyone views the situation this way. For instance, Marc Andreessen, the Silicon Valley entrepreneur and venture capitalist, says information technology is providing significant benefits that just don't show up in the standard measurements of wages and productivity. Consider that consumers have access to services like Facebook, Google and Wikipedia free of charge, and those benefits aren't fully accounted for in the official numbers.

Until recently, this debate was inconclusive. But now Chad Syverson, a professor of economics at the University of Chicago Booth School of Business, has looked more scientifically at the evidence and concluded that the productivity slowdown is all too real. These results are outlined in his recent National Bureau of Economic Research working paper, Challenges to Mismeasurement Explanations for the US Productivity Slowdown.

Syverson notes that a slowdown has come to many advanced economies, almost at the same time, which indicates it is a general phenomenon. Furthermore, the countries with smaller tech sectors still have comparably sized productivity slowdowns, and that is not what would be expected if a lot of unmeasured productivity were hiding in the tech industry.

An additional problem for the optimistic interpretation is this: the productivity slowdown is too big in scale, relative to the size of the tech sector, to be plausibly compensated for by tech progress. Basically, as outlined by Syverson, the productivity slowdown has led to a cumulative loss of $2.7 trillion in gross domestic product since the end of 2004; that is how much more output would have been produced had the earlier rate of productivity growth been maintained. To make up for this difference, Syverson estimates, consumer surplus (consumer benefits in excess of market price) would have to be five times as high as measured in the industries that produce and service information and communications technology. That seems implausibly large as a measurement gap.

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