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Is the Labor Productivity Slowdown Mystery a Statistical Mirage?

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But in my opinion, the productivity slowdown mystery, puzzle or whatever you want to call it has a simple solution: It’s a statistical mirage. As Nobel Prize-winning economist Robert Solow famously put it back in 1987, “You can see the computer age everywhere but in the productivity statistics”.

I’m of the camp that traditional economic metrics simply haven’t kept pace with fast-changing technologies geared toward greater efficiency at lower cost. In other words, official numbers don’t capture the productivity gains coming out of new, often free technologies. The calculations behind the data understate the benefits of innovation – and as a result, underestimate productivity.

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Market Realist – The answer lies in a statistical mirage.

The mystery of waning labor productivity in various developed economies such as the United States (IJH), Europe (HEZU), and Japan (EWJ) is still unsettled. However, various economic literature offers plausible explanations. These include the following:

  • inferior labor quality
  • slower growth in the capital-labor ratio
  • government regulations and trade policies
  • innovation in managerial practices
  • the maturation of some industries
  • measurement error

But no one has provided any conclusive evidence to explain the phenomenon. Others end up blaming a variety of factors such as the ones we already mentioned.

Another possible justification for the decline in labor productivity is the technological advancement in many industries. Economist Robert Z. Lawrence, a professor at the Harvard Kennedy School, mentions technological progress as the major cause for a drop in labor’s productivity in the United States. He further indicated that technology (IXN) has been instrumental in boosting the productivity of labor rather than capital, which led to the fall in the effective capital-output ratio.

Measuring the effects of technology (VGT) on productivity is a difficult task. Productivity is measured through metrics such as GDP (gross domestic product) or GDP per capita. These attempt to capture the overall output of a given economy from a macroenvironmental perspective. However, these two metrics have some lacunas, as they can’t capture the increases in economic output brought about by efficiencies due to technological advancements. As a result, productivity figures as represented by traditional metrics are understated to the extent of use of technology.

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