Monday, February 8, 2016

Productivity Pessimism

I'm hoping I'll have a chance to read Robert Gordon's new book soon, though one of the ironies of being a college professor is that the job doesn't seem to leave much time to read.  Fortunately, Gordon presents a condensed version of the argument in a recent Bloomberg View column, where he explains that he doesn't expect a return to the rapid productivity growth of the mid-20th century.  He writes:
The 1920-70 expansion grew out of the second industrial revolution, when fossil fuels, the internal-combustion engine, advanced metals and factory automation came together to produce electric lighting, indoor plumbing, home appliances, motor vehicles, air travel, air conditioning, television and much longer life expectancy.
The "third industrial revolution" - computers and the internet - is less significant, in his view:
Although revolutionary, the Internet's effects were limited when compared with the second industrial revolution, which changed everything. The former had little effect on purchases of food, clothing, cars, furniture, fuel and appliances. A pedicure is a pedicure whether the customer is reading a magazine or surfing the web on a smartphone. Computers aren't everywhere: We don’t eat, wear or drive them to work. We don't let them cut our hair. We live in dwellings that have appliances much like those of the 1950s and we drive in motor vehicles that perform the same functions as in the 1950s, albeit with more convenience and safety.
Our main measure of technological progress is total factor productivity (tfp) growth, which is sometimes called the "Solow residual" because it is calculated as a leftover, by subtracting from output growth the portions that can be explained by changes in capital and labor.  That is, it is the growth that would occur even if there was no change in the factors of production.

Turning points in tfp growth can be hard to identify because the data are somewhat volatile from year-to-year and have a cyclical component.  With hindsight, economists identified a productivity slowdown around 1973 and a resurgence - with information technology playing a leading role - in the mid-1990s.  However, tfp growth has generally been weak since 2005, raising the question of whether the IT-led productivity boom is over.

This San Francisco Fed Letter from last year discusses some of the reasons for the productivity slowdown.  Gordon's book was the subject of an Eduardo Porter column and a Paul Krugman review.

Update (2/25): In an interview with Ezra Klein, Bill Gates argues against Gordon's view.

5 comments:

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The Arthurian said...

I love the photo in the Eduardo Porter column. MTM looks so very Stepford.

The Arthurian said...

Hi Bill. Maybe you could help me sort out my thoughts on productivity?

"Labor productivity" is one version. This is the straightforward "output per hour" calculcation. "Total Factor Productivity" is another version. The calculation is more complex. Seems to be John Fernald's area of interest.

As you say, TFP "is calculated as a leftover, by subtracting from output growth the portions that can be explained by changes in capital and labor." I'm thinking "labor productivity" includes the changes in capital and labor, and TFP is the part not explained by labor productivity.

Is that somewhere in the ballpark, do you think? I'm not trying to calculate it, just to understand how labor productivity relates to TFP.

Bill C said...

Yes, I think you've got the right idea: labor productivity would increase due to either an increase in tfp or an increase in capital per worker ("capital deepening").

The calculation of labor productivity is: %d(Y/L) = %dTFP + ks*%d(K/L) where I'm using "%d" to denote percent changes, Y for output, L for labor, K for capital and ks for capital share.

From the point of view of living standards, its labor productivity that matters - i.e., normal people wouldn't care if their wages were going up because of technological progress or capital accumulation.


The Arthurian said...

Thank you Bill. That helps a lot. Somehow, I missed the idea that TFP adds in to overall productivity -- even though I know TFP "is calculated as a leftover, by subtracting from output growth the portions that can be explained by changes in capital and labor" as you said.

Maybe I was thrown off by the word "total" in 'total factor productivity'.

I'm fascinate by the idea of TFP as a residual, a leftover, unexplained growth attributed to technological progress. TFP is a black box. Surely technological progress is in there, but surely other things may be in there as well. Thus a door seems to be open to "other things" ...

Thanks.