South-Westerns' Economic News Summaries
Producing More With Less
Topic Productivity and Growth
Key Words Economic Growth, Productivity, and Technology

News Story

In the late 1990’s, significant growth in labor productivity—the amount of output per hour per worker—began to occur because of information technology. After growing at about 4 percent from 1972 to 1995, productivity grew at a blistering pace of 2.5 percent between 1996 and 1999. Most economists believed that the higher productivity was the result of businesses investing in and applying I.T. in their operations. Many firms spent heavily to deploy productivity-enhancing PC’s and new and better software products. In describing this trend, economists referred to what they called the “new economy.” “About half of the growth resurgence from 1995 to 2000 was due to I.T.,” said Dale Jorgenson, Harvard professor and co-author of the recently published “Information Technology and the American Growth Resurgence.”

As the technology investment boom of the 1990’s turned bust in 2000, many analysts feared that productivity gains would dissipate as well. Instead, productivity since 2000 has been strong. The Bureau of Labor Statistics reported that productivity in the third quarter of 2005 was up 3.1 percent over the same quarter last year.

Business spending on productivity-enhancing items in the early years are now paying dividends in terms of continue growth—not just by I.T. firms, but also by those who employ new technology. “The I.T. - producing industry itself, with its extraordinarily rapid pace of change, certainly has contributed to overall productivity growth,” said Martin Baily, a senior fellow at the Institute for International Economics, based in Washington. “But now we’re getting a bigger share form the rest of the economy.”

It’s not just the I.T., but the competitive drive in the economy that makes firms want to compete. “I.T. is a particularly effective enabling tool,” said McKinsey Global Institute director Diana Ferrell, “But without the competitive intensity that drives people to adopt innovation, we wouldn’t see these kinds of gains.”

To compete with Wal-mart, for example, firms from all retailing areas are working furiously to manage supply chains and logistics more efficiently, and to negotiate better terms with both suppliers and employees. I.T. improvements are motivated by the competitive spirit.

The encouraging news to some economists is that a major new breakthrough in I. T. will not be required to fuel further economic growth. “It’s not research and development that cause the big gains in productivity,” Professor Jorgenson said. “The real drivers are things like competition, deregulation, the opening of markets and globalization.”

Questions
1.

Define and discuss what is meant by “increasing productivity.”

2. Discuss the impact of increasing productivity on economic growth.
Source Daniel Gross, “What Makes a Nation More Productive? It’s Not Just Technology”, The New York Times Online, December 25, 2005.
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