NCPA - National Center for Policy Analysis

The New Economy & Productivity Growth

October 29, 2001

Has trend productivity growth risen to a permanently higher level as a result of technological innovation, especially the Internet? Some economists are questioning this "new economy" ever existed. The answer is important because the speed at which productivity returns to trend after the recent slowdown will determine how fast the economy will recover.

  • From 1972 to 1995, average productivity growth output per man hour was 1.5 percent (see figure).
  • In the 1960s, productivity had risen at an average annual rate of 3.2 percent.
  • But between 1995 and 2000, productivity grew at an average annual rate of 2.6 percent.

A new report from the McKinsey Global Institute looks at increased productivity industry-by-industry over the last five years. It found that almost all of the aggregate increase in productivity in the U.S. economy resulted from higher productivity in only six industries, representing just 30 percent of the economy: retail trade, wholesale trade, securities, telecommunications, semiconductors and computer manufacturing.

While some of the productivity increases in these six key sectors resulted from technology, much did not. It came about because of basic market forces, such as economies of scale, competition, shifting consumer demand and managerial innovation.

Thus the McKinsey report concludes that information technology "was not the most important cause of the post-1995 productivity acceleration."

However, just because technology was not the most important factor behind the "new economy" phenomenon, does not negate the idea that productivity growth has risen to a permanently higher trend. It may simply have a broader base than previously thought.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, October 29, 2001.

 

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