July 11, 2018


Why Productivity Isn't Keeping Up With Technology (Peter R. Orszag, July 11, 2018,  Bloomberg)

The disconnect between productivity growth and the technology revolution has triggered a sharp debate in economics. A scintillating new paper by Adair Turner of the Institute for New Economic Thinking suggests that rather than presenting a puzzle, the combination of technological innovation and low measured productivity growth is exactly what we should expect.  [...]

 He writes that "it is quite possible that an acceleration in underlying technological progress, which allows us to achieve dramatic productivity improvement in existing production processes, can be accompanied by a decline in total measured productivity." 

In other words, there is really no puzzle to explain.

The core of Turner's argument is that the impact of new technology on total productivity growth depends crucially on who accrues the income from the new inventions; what additional consumption they choose to enjoy with that income; and the nature of productivity advances in the sectors that workers are shifted into as a result. In particular, if those who directly accrue income from the new inventions choose to consume more services (such as personal services or artistic ones) that are hard to automate, the net result could be the coexistence of rapid technological progress and slow or nonexistent overall productivity growth.

So technological progress and productivity growth have tended to coexist in the past because the workers shifted as a result of the new technologies moved from one sector (say, farming) to another (manufacturing) and in both the sender and recipient sector rapid productivity growth was occurring.

What would happen, though, if the recipient sectors suffer from "Baumol's disease," which features limited potential for productivity improvements because it is hard to replace people with machines in those areas? Then, aggregate productivity growth will not march in lockstep with technological progress. 

Furthermore, as our incomes rise, we may demand more services with Baumol's disease characteristics. The employment projections from the Bureau of Labor Statistics highlight the point. The top four occupations ranked by the number of new jobs projected to be created between 2016 and 2026, for example, are personal care aides, cooks and servers, registered nurses and home health aides. In all four cases, the service provided involves person-to-person interactions that are, at least for now, difficult to automate. That means productivity explosions are unlikely, whatever is happening in the rest of the economy.

Posted by at July 11, 2018 1:35 PM