Breaking the Mold: the U.S. Productivity Miracle

All other things being equal, high productivity growth—a rise in the ability to create more with less of anything—remains the central driver for a nation’s economy, and United States productivity is world renowned (and envied). In the 1990s, productivity growth in many other economically-developed nations remained flat or even decreased; for example, in Spain productivity in service-related industries slowed -1.2% between 1995 and 2004. But in what some economists are calling a productivity miracle, the U.S. managed a 1.3% acceleration in the same field at the same time.

This productivity miracle is even more impressive considering the concept of convergence. Major technological advances generally happen in economically developed regions, particularly the ones such as the U.S. and the Eurozone that sponsor fundamental (non-patentable) research. Because it’s
easier to mimic somebody else’s success rather than create your own, developing countries tend to copy the innovations of their more advanced neighbors and ride on their technological coattails, leading to higher rates of productivity growth.  However, as these nations become richer themselves, their growth rates tend to slow to match everyone else’s. So while productivity growth rates are high in China (6.4%), Russia (3.7%), and South Korea (3.2%), it’s because they’re toward the beginning of that convergence pipeline, with a long row to hoe before they begin to slow.

For the U.S. to break out of that mold implied something unusual happened. Many researchers studying the U.S. productivity miracle are claiming it was caused by the concurrent rise in technological innovation,
especially in information technology, communications, and the Internet. Although it’s true that European firms also manufacture computers and produce software, and have equal access to the Internet, the  researchers are concluding that U.S. corporations more fully exploited these technologies during the 1990s. Their utilization in business to develop productivity-enhancing manufacturing and management techniques, such as just-in-time inventory control, boosted output per worker at rates unexpected by economists.

Among the rather small number of companies that produce Information Technology, the productivity growth rate between 1995 and 2001 was similar between the Eurozone (1.6%) and the U.S. (1.9%). However, among the sectors of industry that utilize the technology, such as banking, business services, and wholesale and retail trade, the difference was much more pronounced between Europe (0.0%) and the U.S. (3.5%). Across all industries, productivity growth remained lower in Europe (1.0%) than in the U.S. (2.0%).

A discussion paper published by the Centre for Economic Performance in April 2007 (authored by Nick Bloom, Raffaella Sadun, and John Van Reenen), entitled “Americans do IT better: US multinationals and the
productivity miracle,” found that this demographic extends beyond international borders. Within a few years of the transaction, the authors demonstrated, U.K. companies purchased by U.S. corporations became significantly more productive than either U.K. firms purchased by other foreign corporations or their domestically-owned counterparts, which remained the least productive firms within the dataset due
to their dependence upon traditional methods of doing business and low utilization of IT.

So it’s not just the technology, nor is it merely the creation of more powerful computers at lower cost, but something unusual happened to kick U.S. productivity into a higher gear since the mid-1990s. Specifically what was it?

The CEP discussion paper gives special emphasis to the flexibility of the U.S. business model in adopting technological changes to suit its needs and increase its efficiency. Although this characteristic doesn’t
give the U.S. a permanent advantage (nor make it inherently superior), it does provide multiple short-term and therefore temporary advantages over more traditionally inclined or commercially conservative nations.

If flexibility is the key to the U.S. productivity miracle, then there are two possible scenarios for the future: one, other regions of the world, in particular Japan, the U.K., and the Eurozone, may begin registering similar levels of growth as they adopt IT-enhanced business models, perhaps modified to suit their cultural needs; or two, if the world economy remains in a state of technological flux, the more flexible U.S. model could easily retain its advantage or gain another, fresh one as new innovations emerge and are adopted in turn.

As history shows, technological molds are made to be broken.

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