Does the United States have a Productivity Slowdown or a Measurement Problem?

Abstract

After 2004, measured growth in labor productivity and total factor productivity (TFP) slowed. We find little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in information-technology (IT)-related goods and services. First, mismeasurement of IT hardware is significant prior to the slowdown and because the domestic production of these products has fallen, the quantitative effect on productivity is larger in the 1995-2004 period than since, despite mismeasurement worsening for some types of IT. Hence, our adjustments make the slowdown in labor productivity worse. The effect on TFP is more muted. Second, many of the tremendous consumer benefits from smartphones, Google searches, and Facebook are, conceptually, non-market: Consumers are more productive in using their nonmarket time to produce services they value. These benefits raise consumer well-being but do not imply that market-sector production functions are shifting out more rapidly than measured. Moreover, estimated gains in non-market production are too small to compensate for the loss in overall well-being from slower market-sector productivity growth. In addition to IT, other measurement issues we can quantify (such as increasing globalization and fracking) are also quantitatively small relative to the slowdown. * Byrne, Fernald and Reinsdorf are at the Federal Reserve Board (david.m.byrne@frb.gov), the Federal Reserve Bank of San Francisco (fernaldjg@gmail.com), and the International Monetary Fund (mreinsdorf@imf.org), respectively. We thank Martin Baily, Erik Brynjolfsson, Erwin Diewert, Carol Corrado, Jean Flemming, Bob Gordon, Pete Klenow, Jim Stock, and Hal Varian for helpful comments and conversations. We thank Travis Adams, Genevieve Denoeux, and Arthi Rabbane for excellent research assistance. The title refers to a phrase in a Wall Street Journal article by Aeppel (2015). The views expressed in this paper are those of the authors and should not be attributed to the IMF or its managers or Executive Directors, the Federal Reserve Bank of San Francisco, the Board of Governors, or the Federal Reserve System. "The things at which Google and its peers excel, from Internet search to mobile software, are changing how we work, play and communicate, yet have had little discernible macroeconomic impact.…Transformative innovation really is happening on the Internet. It's just not happening elsewhere."Greg Ip, Wall Street Journal, August 12, 2015 U.S. productivity data highlight the paradox at the heart of the quotation above. The fast pace of innovation related to information technology (IT) seems intuitive and obvious. Yet productivity growth has been modest, at best, since the early 2000s. We examine the hypothesis that the U.S. economy has a growing measurement problem rather than a productivity slowdown (e.g., Aeppel, 2015, Feldstein, 2015, and Hatzius and Dawsey, 2015. Some components of real output, including the services provided by information technology, are indeed poorly measured.Yet for mismeasure...

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