What Role Does Technology Play in Productivity?

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What Role Does Technology Play in Productivity?

An examination of how productivity is impacted by new technology, based on two long-lasting studies.

· Agile Zone ·
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In whatever field you operate, there is likely to be no shortage of technology vendors purporting to revolutionize your business.  Alas, as research earlier this year showed, we tend to over-estimate the impact technology will have.

A second study, published recently, suggests that not only are we exaggerating the change technology will bring, but we might also be misunderstanding the kind of changes it will bring.

When we normally discuss technology based changes in the workplace, productivity experts tend to fall into one of two camps.  One believes that new technologies will make labor more productive, whilst the other suggests that new technologies will improve productivity across the board.

This latest study suggests the answer, as with many things, sits somewhere in between, and they have some strong numbers to back up their claim.

The Impact of Technology on Productivity

The findings are particularly pertinent given the current concerns around the labor displacing potential of many new technologies.  The authors suggest that, if anything, technology changes on productivity are complex and nuanced.

It isn’t the case that it will always make labor more productive, nor indeed that this would always result in a loss of employees.  It also highlights how the very means of measuring productivity is somewhat more complex than has traditionally been the case.

“Historically, people have looked at productivity as a single number. What we’re showing is that it’s not. Technological change has multiple dimensions,” they say. “It changes the perspective people have on productivity. That means we need to rethink how we measure productivity and account for the fact that it’s multi-dimensional.”

The Multiple Facets of Productivity

The researchers utilized panel data from individual companies alongside econometric techniques to fully understand the various faces of productivity.  The data was taken from 2,375 Spanish manufacturing companies across a 16 year period to 2006.

This period oversaw a large amount of productivity growth, albeit accompanied by rather stagnant employment levels, with a large investment in capital.

The analysis found that labor-augmenting technologies can typically increase productivity by around 2% per year.  This is matched however by productivity rises in other areas too.

“If you hold everything fixed, the industry will thus produce 4% more output growth because of technological change,” the authors say. “It’s huge … If you think about it, you don’t change anything in the economy and output is going to grow by 4% a year using the same amount of input.”

With productivity growth relatively stagnant throughout much of the western world, the authors contend that their study provides some important lessons for both businesses and economists.

The authors plan to continue studying productivity, and will next turn their attention to how these findings affect employment.  In other words, when labor costs fall, do companies cut the workforce or expand it?

“Technological change is not exogenous in the sense that a firm doesn’t wake up one morning to find itself more productive. At least to some extent, firms bring about technological change themselves through their R&D efforts, acquiring intellectual property, improving their internal organization,” they conclude. “Now that we can disentangle different types of technological change in the data, the next step is to ask which activities of the firm are related to which type of technological change, and how these activities respond to economic incentives.”

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