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Today’s Productivity Paradox

Recent trends in productivity growth make it hard to be optimistic about the future. But some historical perspective is in order: When radical innovations are first rolled out, their immediate effect is to reduce, not raise, productivity.

NEW YORK – Recent trends in productivity growth make it hard to be optimistic about the future. In 2014, the global growth of total factor productivity, or TFP, which measures the combined productivity of capital and labor, was essentially zero for the third consecutive year. This was down from 1% in 1996-2006 and 0.5% in the crisis years of 2007-2012. And, by every indication, 2015 has been no less dismal. In the US, revised data released at the beginning of December show productivity up only 0.6% year on year in the third quarter.

If the underlying rate of TFP growth has in fact fallen from its historical norm of 1.5% per year to near zero in countries like the United States, then the living standards of today’s young adults will rise much more slowly than those of their parents. Any increase will depend entirely on improvements in education and training, which are absent from the data, and from investment in equipment and structures, which is depressed relative to historical levels.

Economists such as Robert Gordon of Northwestern University argue that this slump in productivity growth reflects the stagnation of technology. Gordon argues that all of the epochal advances, from running water and electricity to the internal combustion and jet engines, have been made. The positive effect of instant messaging and video gaming on productivity and living standards pales in comparison.

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