The Internet age has given us blisteringly fast connectivity to the World Wide Web, cloud computing, nearly instant collaboration and high definition face-to-face video communication with our peers around the world. Yet in terms of our rate of economic productivity, we have not only stalled in the past several years but also taken hugely dramatic dips. The promise of the Internet making everyone’s job easier and boosting economic advancement has not been met. Why?
The answer lies in a closer look at Solow’s Paradox. The concept was first described in 1987 by economist and author Robert Solow, who stated, “You can see the computer age everywhere but in the productivity statistics.” As it grew in popularity, Solow’s Paradox became defined as the “discrepancy between measures of investment in information technology and measures of output at the national level.” In particular, it asks why the rate of productivity increase appears to be slowing dramatically in the Internet age.
And that is undeniably true. According to an early November report from the Bureau of Labor Statistics, 2014’s third quarter business sector labor productivity increased at a 2.0 percent annual rate. Output increased 4.4 percent and hours worked increased 2.3 percent. From the third quarter of 2013 to the third quarter of 2014, productivity rose 0.9 percent as output and hours worked increased 3.0 percent and 2.1 percent, respectively.
Looking at the year-over-year performance by quarter, that seems like good news. But taking a closer look, productivity actually declined steadily from a high of 8.3% in Q2 2009, including sizeable dips of -2.7 percent in Q1 2011 and – 4.5% in Q1 of 2014.