Employment and Income
Section III
Why is productivity important: If productivity in terms of output for worker grows at 3%, the historic US rate, workers can be rewarded with a 2% increase in wages and a 1% decrease in the work week with no increase in the cost of labor. The productivity paradox is the empirical observation that with all the investment in information technology the growth of productivity has been slow since 1973. A chart of business productivity in output/hour is shown below:
The data shows a downward trend since the 60s that has been reversed since 1995. There are several explanations for this paradox:
Productivity paradox concerning information technology investment: Paul David, "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox," American Economic Review: Papers and Proceedings (May 1990) points out that it was decades after the introduction of the electric motor that business reorganized production using electric motors to increase productivity. Likewise one would expect a two decade delay for a rapid increase in productivity from investment in information technology. In my opinion the increase in productivity relates to business uses on the Internet to decrease paperwork and inprove business processes.
OPEC: Before OPEC formed in 1973 energy in the US was cheap so economic agents did not have much incentive for energy efficiency. The US required a 1% increase in energy to increase GDP 1%. Europe and Japan where energy was much more expensive only required a 1/3% increase in energy to increase their respective GDP 1%. A consequence of OPEC was to shift invvestment from making labor more efficient to reducing energy requirements through better insulation in buildings and converting waste heat into electricity rather than allow it to escape into the atmosphere. Given the current price of a barrel of oil the US is going through another major effort for greater energy efficiency and creation of alternative fuels.
Environment: The environmental legislation of the 1960s and the creation of the Environmental Protection Agency under Nixon also meant that investment shift away from making labor more efficeint to reducing enviromental problems.
Failure of US manufacturers: The problems of US manufacturers were discussed in the Chapter on manufacturing. Since the mid 80s US corporations have slowly become much more efficient through reorganization during which they have shed millions of employees. By the 1990s manufacturing firms were returning to historic rates of productivity advance.
I am optimistic about increasing productivity in the future. The lag in rapid increase in productivity in my mind is due to first the need to convert all data to electronic form compatable with software throughout the firm and the advance of communication needed to use the data. The the past five years business has begun to radically reorganize their business processes through the internet to take advantage of computation and communication. These results have shown up in recent productivity figures.The rapid increase in service productivity in my estimation will come with broadband communications so that sevices can be provided through the internet. In consulting, consultants visit the customer site during the week and are flown home on the weekends. At the site they get room, board, and a car. The overhead is about 40%. Only major corporations can afford such expense. Enst and Young has Ernie, a consulting service through the internet. This is just a prelude of what is to come through the internet drastically reducing costs and expanding consulting to all firms.
Productivity