The productivity paradox: is there a measurement problem?

Nov 11, 2015 • Features • Management • management • Professor Andy Neely • Cambridge Service Alliance • Service Management

When it comes to assessing the link between productivity and technology should the figures governments are concerned about be re-evaluated, asks Professor Andy Neely of the Cambridge Service Alliance.

There’s been much debate in recent months about the productivity paradox - put simply there’s a long standing concern that technology, particularly information technology, does not seem to deliver the productivity gains that might be expected.

This concern has resurfaced in the UK, with the Government raising questions about why the UK’s productivity has not grown as much as other countries. In fact, George Osborne recently called the UK’s low productivity growth “the challenge of our time”.

The same topic came up in a recent email discussion with colleagues from ISSIP - the International Society for Service Innovation Professionals, this time prompted by an article in the Wall Street Journal entitled “Silicon Valley Doesn’t Believe US Productivity is Down”. In essence the Wall Street Journal argument was that developments in technology are not captured in the Government’s productivity figures - apps that help people find restaurants more quickly or hail cabs from their phones clearly improve the efficiency with which we can do things.

Doing more with less is a classic definition of productivity - so these apps must be improving productivity, argues the Wall Street Journal (and those it quotes - including Hal Varian, Google’s Chief Economist).

While I accept the argument that apps and associated technologies allow us to do more with less, I think there’s a need to unpack the relationship between these developments and measures of productivity more carefully.

When talking about productivity - or the lack of productivity - we need to think about the economic impact of these cheaper and/or free services.

Traditionally governments have measured labour productivity in terms of GDP per hour worked. As technology replaces labour, GDP stays the same or increases, while labour hours go down - hence productivity increases.

However, there’s an interesting new phenomenon which complicates the picture.

Take, for example, Uber. I’m a fan of Uber - the app is great. It’s convenient. I’ve never had a bad service from an Uber driver. I love the fact that I can rate drivers and they can rate customers at the end of journeys. I love the fact that the cost of the ride gets charged to my credit card and the receipt automatically emailed to me. But I also love Uber because it is cheaper - I pay less for a Uber car than I do for a black cab in London. Better service, pleasant drivers, and lower prices - what’s not to like?

Other firms have similar business models – think Amazon or Airbnb. Still others provide me a service for free – Google and TripAdvisor - and don’t charge me for the information they provide, instead making their money through third parties.

When talking about productivity - or the lack of productivity - we need to think about the economic impact of these cheaper and/or free services.

Lower prices to consumers must mean lower GDP. The efficiency gains are there, but they are not being captured in productivity gains because the benefits are being passed on to consumers in the form of lower prices, rather than captured in the official GDP statistics.

Maybe a more nuanced discussion about productivity is needed where we look at both sides of the equation: increases in value and hence GDP, and increases in efficiency reflected in lower costs to consumers.