The Productivity Paradox: What Is It And How Can We Move Beyond It?
It’s a depressing adage we’ve all heard time and time again: “an increase in technology does not necessarily translate to an increase in productivity.” Put another way by Robert Solow, a Nobel laureate in economics, “You can see the computer age everywhere but in the productivity statistics.”
In other words, just because our computers are getting faster, that doesn’t mean that that we will have an equivalent leap in productivity. In fact, the opposite may be true! New York Times writer Matt Richel wrote in an article for the paper back in 2008 that stated, “statistical and anecdotal evidence mounts that the same technology tools that have led to improvements in productivity can be counterproductive if overused”.
There’s a strange paradox when it comes to productivity. Rather than an exponential curve, our productivity will eventually reach a plateau, even with advances in technology. So what does that mean for our personal levels of productivity? And what does this mean for our economy as a whole? Here’s what you should know about the productivity paradox, its causes, and what possible solutions we may have to combat it.
What is the Productivity Paradox?
There is a discrepancy between the investment in IT growth and the national level of productivity and productive output. The term “productivity paradox” became popularized after being used in the title of a 1993 paper by MIT’s Erik Brynjolfsson, a Professor of Management at the MIT Sloan School of Management, and the Director of the MIT Center for Digital Business.
In his paper, Brynjolfsson argued that while there doesn’t seem to be a direct, measurable correlation between improvements in IT and improvements in output, this might be more of a reflection on how productive output is measured and tracked.
“Intangibles such as better responsiveness to customers and increased coordination with suppliers do not always increase the amount or even intrinsic quality of output, but they do help make sure it arrives at the right time, at the right place, with the right attributes for each customer.
Just as managers look beyond “productivity” for some of the benefits of IT, so must researchers be prepared to look beyond conventional productivity measurement techniques,” he wrote in his conclusion.
How Do We Measure Productivity, Anyway?
And this brings up a good point. How is exactly is productivity measured?
In the case of the US Bureau of Labor Statistics, productivity gain is measured as the percentage change in gross domestic product per hour of labor.
But other publications, such as US Today, argue that this is not the best way to track productivity, and instead use something called Total Factor Productivity (TFP). According to US Today, TFP “examines revenue per employee after subtracting productivity improvements that result from increases in capital assets, under the assumption that an investment in modern plants, equipment and technology automatically improves productivity.”
In other words, this method weights productivity changes by how much improvement there is since the last time productivity stats were gathered.
But if we can’t even agree on the best way to track productivity, then how can we know for certain if we’ve entered the productivity paradox?
Possible Causes of the Productivity Paradox
Brynjolfsson argued that there are four probable causes for the paradox.
▪ Mismeasurement: the gains are real, but our current measures miss them;
▪ Redistribution: there are private gains, but they come at the expense of other firms and individuals, leaving little net gain;
▪ Time lags: the gains take a long time to show up; and
▪ Mismanagement: there are no gains because of the unusual difficulties in managing IT or information itself.
There seems to be some evidence to support the mismeasurement theory, as shown above. Another promising candidate is the time lag, which is supported by the work of Paul David, an economist at Oxford University. According to an article in“The Economist”, his research has shown that productivity growth did not accelerate until 40 years after the introduction of electric power in the early 1880s. This was partly because it took until 1920 for at least half of American industrial machinery to be powered by electricity.”
Therefore, he argues, we won’t see major leaps in productivity until both the US and major global powers have all reached at least a 50% penetration rate for computer use. The US only hit that mark a decade ago, and many other countries are far behind that level of growth.
The Paradox and the Recession
The productivity paradox has another effect on the recession economy. According to Neil Irwin, “Sky-high productivity has meant that business output has barely declined, making it less necessary to hire back laid-off workers…businesses are producing only 3 percent fewer goods and services than they were at the end of 2007, yet Americans are working nearly 10 percent fewer hours because of a mix of layoffs and cutbacks in the workweek.”
This means that more and more companies are trying to do less with more, and that means squeezing two or three people’s worth of work from a single employee in some cases. According to Irwin, “workers, frightened for their job security, squeezed more productivity out of every hour [in 2010].”
A recent article on Slate puts it all into perspective with one succinct observation: “Perhaps the Internet is just not as revolutionary as we think it is. Sure, people might derive endless pleasure from it—its tendency to improve people’s quality of life is undeniable. And sure, it might have revolutionized how we find, buy, and sell goods and services. But that still does not necessarily mean it is as transformative of an economy as, say, railroads were.”
Still, Brynjolfsson argues that mismeasurement of productivity can really skew the results of people studying the paradox, perhaps more than any other factor.
“Because you and I stopped buying CDs, the music industry has shrunk, according to revenues and GDP. But we’re not listening to less music. There’s more music consumed than before,” he explains. “On paper, the way GDP is calculated, the music industry is disappearing, but in reality it’s not disappearing. It is disappearing in revenue. It is not disappearing in terms of what you should care about, which is music.”
Perhaps the paradox isn’t a death sentence for our productivity after all. Only time (and perhaps improved measuring techniques) will tell.
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