Has American productivity really slowed?

Alex Verkhivker | May 22, 2016

Sections Economics

The labor productivity rate measures the amount of real GDP produced by an hour of labor. And in the United States, labor productivity has slowed sharply in recent years. From 2005 through the third quarter of 2015, it averaged just 1.3 percent growth per year, a significant drop from the 2.8 percent average yearly growth between 1995 and 2004. 

The cause of the slowdown has been hotly debated, with some economists arguing it is mostly illusory, a result of mismeasurement. But Chicago Booth’s Chad Syverson tests and casts doubt on a theory at the core of the mismeasurement hypothesis: the notion that productivity statistics aren’t taking into account the surplus generated from the digital revolution. 

Syverson starts by calculating productivity on the premise that the productivity slump didn’t happen. Using conservative estimates, he finds that the counterfactual output in the third quarter of 2015 would be 15 percent higher than the actual measured output. 

But the consumer surplus created by digital technology fails to explain this $2.7 trillion in lost ouput. And three additional data patterns pose trouble for the mismeasurement hypothesis. 

  1. The productivity decline is not unique to the US, and there is no correlation between the size of a country’s slowdown and measures of intensity of information and communication technologies. 
  2. Had the supposedly mismeasured incremental output been incorporated into the official economic statistics, the industries that specialize in information and communication technologies would have seen revenue growth that was four times as large as was measured. That immense implied amount of mismeasurement doesn’t seem to be consistent with other shifts observed in these industries. 
  3. The gap between US gross domestic income and gross domestic product appeared even before the slowdown. Syverson notes that it actually occurred during a period of acceleration in productivity statistics. 

The cumulative impact of these patterns suggests that the mismeasurement hypothesis is hard to reconcile with the facts. The productivity slowdown has opened an unexplained gap equal to 15 percent of GDP, while the value of digital technologies in total accounted for only 7.7 percent of GDP before the slowdown.  The US labor productivity decline since 2004 appears to be legitimate.