Is the information technology revolution over?

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Abstract:

Given the slowdown in labor productivity growth in the mid-2000s, some have argued that the boost to labor productivity from IT may have run its course. This paper contributes three types of evidence to this debate. First, we show that since 2004, IT has continued to make a significant contribution to labor productivity growth in the United States, though it is no longer providing the boost it did during the productivity resurgence from 1995 to 2004. Second, we present evidence that semiconductor technology, a key ingredient of the IT revolution, has continued to advance at a rapid pace and that the BLS price index for microprocesssors may have substantially understated the rate of decline in prices in recent years. Finally, we develop projections of growth in trend labor productivity in the nonfarm business sector. The baseline projection of about 1¾ percent a year is better than recent history but is still below the long-run average of 2¼ percent. However, we see a reasonable prospect — particularly given the ongoing advance in semiconductors — that the pace of labor productivity growth could rise back up to or exceed the long-run average. While the evidence is far from conclusive, we judge that "No, the IT revolution is not over."

Key Takeaways

  • Growth in labor productivity has been lackluster since 2004, averaging about 1½ percent annually, well below the long-run average rate of 2¼ percent. 
  • The slowdown in productivity growth pre-dates the financial crisis.  The recession and anemic recovery likely decreased productivity further, but they are not the root cause.
  • The slower pace of productivity growth can be largely explained by a reduced contribution from IT, after the tech boom from the mid-1990s to about 2004.
  • Analysts generally believe that productivity growth will strengthen somewhat in coming years, but not by enough to match the long-run average rate.
  • Innovation in semiconductor technologies, which make computing faster, smaller, and cheaper, provide reason to believe that the IT revolution could pick up more substantially.
  • If this were to happen, the pace of labor productivity growth could rise back up to its long-run average of 2¼ percent or even move higher.

 

 

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About the Author

 

Stephen D.
Oliner
  • Stephen D. Oliner is a resident scholar at the American Enterprise Institute (AEI) and a senior fellow at the University of California, Los Angeles (UCLA) Ziman Center for Real Estate.

    Oliner joined AEI after spending more than 25 years at the Federal Reserve Board. An economist by training, Oliner held a number of high-level positions at the Fed and was closely involved in the Fed's analysis of the US economy and financial markets. Since leaving the Fed, Oliner has become well known for his analysis of US monetary policy and has maintained an active research agenda that focuses on real estate issues and the US economy’s growth potential.  He is coprincipal developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.

    Oliner has a Ph.D. and an M.S. in economics from the University of Wisconsin. He received a B.A. in economics from the University of Virginia.

  • Phone: 202.419.5205
    Email: stephen.oliner@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202.419.5212
    Email: emily.rapp@aei.org

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