NCPA - National Center for Policy Analysis

Technology And Productivity

August 1, 1997

When computers were first introduced, many economists predicted they would accelerate productivity dramatically as their use became widespread. Now, however, experts are puzzled as to why the data aren't showing the positive impact on productivity they expected.

  • Spending on computers rose from less than 0.1 percent of all non-housing investment in 1970 to 12.8 percent by 1985 -- and spending on information processing equipment over that period grew an average of 12.5 percent a year.
  • Yet productivity among all firms inched up just 1.3 percent a year, on average.

Several recent studies point to possible reasons. A study by economist Donald Allen, in the St. Louis Federal Reserve Review, found that productivity rose at different rates in different sectors of the economy. He also found that time might be a factor -- with productivity gains lagging information technology spending by about five years.

It apparently takes time for firms to learn to fully use computers and other fast-changing technology. When they do, some case studies show a return on high-tech investment as high as 50 percent.

Another study, by economists Martin Baily and Robert Gordon, showed that productivity is rising quickly in service industries, but is not showing up in the official numbers for technical reasons.

  • One reason is that if spending on computers helps a firm gain market share, but the overall size of the industry stays the same, there will be no change in official productivity numbers.
  • Also increases will not show up if computers just make business more convenient for consumers.
  • A final reason is that computers are still a small share of the capital stock, making up just 2 percent in 1993.

So what may matter most is how fast computers are adopted throughout the economy, analysts observe.

Source: Perspective, "The Productivity Puzzle," Investor's Business Daily, August 1, 1997.


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