Annual Labor Productivity Growth, 2001 – 2021 Q1
Our optimism is grounded in our research which indicates that most OECD countries are just passing the lowest point in a productivity J-curve. Driven by advances in digital technologies, such as artificial intelligence, productivity growth is now headed up.
There are three reasons that this time around the productivity J-curve will be bigger and faster than in the past.The productivity J-curve describes the historical pattern of initially slow productivity growth after a breakthrough technology is introduced, followed years later by a sharp takeoff. Our research and that of others has found that technology alone is rarely enough to create significant benefits. Instead, technology investments must be combined with even larger investments in new business processes, skills, and other types of intangible capital before breakthroughs as diverse as the steam engine or computers ultimately boost productivity. For instance, after electricity was introduced to American factories, productivity was stagnant for more than two decades. It was only after managers reinvented their production lines using distributed machinery, a technique made possible by electricity, that productivity surged.
The first is technological – The past decade has delivered an astonishing cluster of technology breakthroughs. The most important ones are in AI: the development of machine learning algorithms combined with large decline in prices for data storage and improvements in computing power has allowed firms to address challenges from vision and speech to prediction and diagnosis. The fast-growing cloud computing market has made these innovations accessible to smaller firms.
Significant innovations have also happened in biomedical sciences and energy. In drug discovery and development, new technologies have allowed researchers to optimize the design of new drugs and predict the 3D structures of proteins. At the same time, breakthrough vaccine technology using messenger RNA has introduced a revolutionary approach that could lead to effective treatments for many other diseases. Moreover, major innovations have led to the steep decline in the price of solar energy and the sharp increase in its energy conversion efficiency rate with serious implications for the future of the energy sector as well as for the environment.
The costs of covid-19 have been tragic, but the pandemic has also compressed a decade’s worth of digital innovation in areas like remote work into less than a year. What’s more, evidence suggests that even after the pandemic, a significant fraction of work will be done remotely, while a new class of high-skill service workers, the digital nomads, is emerging.
As a result, the biggest productivity impact of the pandemic will be realized in the longer-run. Even technology skeptics like Robert Gordon are more optimistic this time. The digitization and reorganization of work has brought us to a turning point in the productivity J-curve.
When you put these three factors together—the bounty of technological advances, the compressed restructuring timetable due to covid-19, and an economy finally running at full capacity—the ingredients are in place for a productivity boom. This will not only boost living standards directly, but also frees up resources for a more ambitious policy agenda.
Erik Brynjolfsson is a professor at Stanford and director of the Stanford Digital Economy Lab. Georgios Petropoulos is a post-doc at MIT, a research fellow at Bruegel, and a digital fellow at the Stanford Digital Economy Lab.