IT--Key to Productivity Growth in the 1990s





Economist Hal Varian, in the NYT (Feb. 12, 2004):

PRODUCTIVITY growth took a breather last quarter, slowing to 2.7 percent, after the previous quarter's torrid 9.5 percent growth. Still, by historical standards, 2.7 percent is a respectable number.

From 1948 to 1973, productivity grew at close to 3 percent annually, doubling the living standard in that period. Then came the dark age of productivity growth: from 1974 to 1994, it averaged only 1.4 percent a year. From 1995 to 2000, we had something of a productivity renaissance, with growth climbing to more than 2.5 percent a year.

When the economy started to slow down in 2000, many economists expected productivity growth to fall back under 2 percent. But contrary to these expectations, productivity has continued to grow strongly.

It is difficult to overstate the importance of productivity growth for the long-run health of the economy. Over the years, virtually all economic progress has come from productivity growth. An increase of half a percent a year can make a huge difference over 20 or 30 years.

So it's pretty important to understand why productivity growth declined so sharply in the 70's and rebounded so strongly in the 90's.

Unfortunately, there is no consensus about why productivity growth slowed in the first place, though there is no shortage of theories. Various factors, including the 1973 oil price shock, the baby boomers' entry into the labor market, an increase in regulation and a slowdown in technological innovation seem to have played a role.

But there is an emerging consensus about why productivity growth surged again in the mid-90's: most economists say information technology played a major role.

 


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