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OM in the News: U.S. Productivity–Is It Missing or in Hiding?

July 20, 2015

productivityI always start my OM course with a discussion of why productivity is so important. As The Wall Street Journal (July 17, 2015) writes: “Productivity matters, because at a 2% annual growth rate, it takes 35 years to double the standard of living; at 1%, it takes 70. Low productivity growth slows the economy and holds down wages.” For well over a century, we have been able to increase productivity at about 2.5% per year. But for a decade, economic output per hour worked—the federal government’s formula for productivity—has barely budged. Over the past two quarters, in fact, it has fallen. Sluggish productivity is raising alarms all the way to Federal Reserve Chairwoman.

Silicon Valley economists, though, say productivity means giving people and companies tools to do things better and faster. By that measure, there is an explosion under way, thanks to the gadgets, apps and digital geegaws spewing out. Consider the efficiency of hailing a taxi with an app on your mobile phone, or finding someone who will meet you at the airport and rent your car while you’re away (a new service in San Francisco). Add in online tools that instantly translate conversations or help locate organ donors. They also make the U.S. more productive, don’t they?

In 1987, during the last period of productivity hand-wringing, Nobel economist Robert Solow quipped: “You can see the computer age everywhere but in the productivity statistics.” From 1995 to 2004, it finally looked like the digital age was paying off: Productivity growth rates closed in on 3%; since 2010, they have dipped below 1%. Yet in Silicon Valley, the idea of a productivity slowdown seems ridiculous to technologists. At the heart of their argument is the free and invaluable Internet search, cutting short the time to, say, learn how to grow geraniums or find the best Mexican restaurant. Many economists question why productivity measures can’t capture the full benefit of improved products and services, such as a refrigerator that signals when the milk is getting low.

Classroom discussion questions:

1. Why is productivity so important to citizens and to nations?

2. How can productivity be increased at, say, the Post Office?

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