by Andrew White | November 18, 2015 | Comments Off on How IT-based Productivity MIGHT Evolve in the next few Years…
I was reading this week’s US print edition of the Economist and of course I was drawn to several articles:
- The Never Ending Story: First America, then Europe. Now the debt crisis has reached emerging markets (Leader and Briefing).
- Wages: Looking for a Rise (United States).
It was the second article that really caught my interest. I noted a reference to a paper by John Fernald and Bing Wang, titled, The Recent Rise and Fall of Rapid Productivity Growth. This article, only 5 pages long, is just dynamite. It goes to the heart of “Does IT Matter” and the IT productivity paradox, and therefore in how we will improve our standard of living (or not). The 5 pages are illuminating for a number of reasons. First the article nicely explains the strong IT-driven somewhat self-evident growth in productivity between 1996 and 2003. The article then highlights how productivity fell since that period. The article also explores the driver of growth, comparing IT-based productivity to hours worked (non-productivity based). Actual labor or hours worked can also increase output without an increase in productivity.
Let’s look at that again: economic growth can be driven by labor (more hours worked) or productivity (more outcome for a given income). Who thinks emails has increased productivity? I think email’s contribution to productivity was long ago – it replaced paper mail; but since about the late 1990’s, email did not add to productivity; we simply just did more email before breakfast and during and after dinner. We just did more hours worked at the same level of productivity. I noted this earlier in the year in Once More with Feeling: What’s Wrong with Productivity.
The Fernald/Wang article then explores the various aspects to how IT drives growth – such as IT producing industries (e.g. semi-conductor), IT intensive (those industries that use technology) as well as non IT-intensive and bubble sectors. The article suggests that IT producing sectors drove a significant component of growth between 1995 and 2004, and that slowed through 2007 and again after 2011. However, the collapse in overall productivity is in the IT-intensive industries. For example, the article suggests that, “by the early 2000s industries like retailing where already substantially reorganized.” It is as if IT has worked its magic and that’s our lot. Really? I don’t think so. Retail has finished improving its IT-intensive productivity? From what I can see in Retail it has really only just gotten started!
The authors then call out what is in fact true but also chilling: IT-intensive measures are based on data from the BLS, on estimated payments for IT capital as a share of an industry’s value added. In other words, how innovation spreads and accounts for changes in productivity-based performance are really based on pseudo estimates, not even a real measure for how work changes. In other words, we just don’t know how to measure real IT-intensive based productivity changes. The conclusion – the IT paradox of old – is that by “the mid-2000s, the low-hanging fruit of IT-based innovations had been plucked.” This is the, “Does IT Matter” of Nicholas Carr. This so called estimate is actually referred to as total factor productivity (TFP). It itself is not a definitive measure; it is implied by looking at other numbers that leave a gap that just has to come from some productivity improvement.
I have been thinking about IT-based innovation and how it diffuses through industries recently. In Once More with Feeling: What’s Wrong with Productivity I explore the different kinds of innovation in IT (processing power for any work, and changes in the work itself) and I noted that there are nuances not captured in the BLS data. Armed with this recent thinking about how IT-based innovation is adopted across industries, and the different nature of IT-based innovation, I am encouraged to explore and anticipate how the author’s figure 3, Contributions by Industry to type to TFP growth will evolve in the next four years. Here is the original chart:
In the chart you can see clearly the collapse in overall productivity but also the significant reduction from the light green which is the IT-intensive component. I now extrapolate the next few years by considering how several IT-based innovations are being adopted the economy in general. You will see some changes in the dynamics of several productivity segments.
You will notice in the following chart:
- IT producing TFP growth will increase. This is due mainly to cloud as a source for ubiquitous computing power for all forms of information processing
- IT-intensive TFP growth will increase significantly. This is due to a number of waves, each reinforcing the previous that operate as multiple platforms for subsequent innovation. Examples started with big data, but this will be eclipsed by IOT. Supporting roles will be identified from various innovations related to advanced analytics, information trust & governance, and intelligent or smart machines/algorithms.
- Non IT intensive – no comment but it won’t be negative
- Bubble sectors – already positive again and likely to hover around zero
Overall the TFP should approach 1.5% for 2011-2014 and then over 2% from 2014 to 18. Beyond that it is hard to ‘guestimate’ since Skynet may take over and redefine what we mean by AI or GDP. Either way, until that time we have much to do or a lot of growth to manage.
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