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Here's why productivity may grow even faster this decade than in the 1990s

The question on many minds these days is: How can the U.S. economy regain its late-1990s vigor?

Economists say the most important driver of long-term economic growth is productivity-the output workers produce per hour. Increasing productivity enables companies to pay higher wages without raising prices, thus improving our standard of living.

The importance of technological innovation in sustaining productivity growth is widely recognized today. But during the 1970s and 1980s, stubbornly sluggish business productivity led some economists to question the value of many companies' extensive investments in information systems.

"We see the computer age everywhere but in the productivity statistics," commented Nobel laureate Robert Solow of the Massachusetts Institute of Technology in 1987.

But the benefits became clear as fast-growing technology industries-many of them using state-of-the-art technology to boost their own output-became increasingly significant contributors to the overall economy. Beginning in 1995, U.S. productivity accelerated to rates of growth not seen in two decades, and an economic boom followed. Federal Reserve Chairman Alan Greenspan credited technology with enabling the nation to achieve faster growth than previously thought possible without sparking inflation.

And as the economy slowed last year, technology helped businesses to adjust quickly. As a result, growth in productivity remained strong, building the basis for a recovery.

"The fact that firms were able to respond quickly to signs of a slowdown may be due to better information systems," said economist Hal R. Varian of the University of California, Berkeley.

Further confirmation of the link between high tech and high productivity has come from studies of hundreds of large firms by MIT economist Erik Brynjolfsson, who concluded that information technology increases output more than any other type of capital investment. Brynjolfsson found that gains from information technology grow over time as workers use it to improve how they do business.

History teaches us that new business processes made possible by technology can eventually multiply technology's direct benefits many times over. For instance, electric motors were used to automate manufacturing plants beginning in the late 1800s. But the most significant productivity gains came later, when business innovations that relied on electricity, such as Henry Ford's assembly line, made fuller use of the technology.

Indeed, applying technology to create and advance new business processes may be one of the most rewarding investments organizations can make today. Recently Chairman Greenspan suggested that U.S. productivity may grow even faster this decade than in the late 1990s as business processes are re-engineered to realize the full benefits of technology investments.

Just as Henry Ford found ways to revolutionize manufacturing, the challenge today is to make the best use of information to make businesses even more agile, efficient and productive.

Posted May 20, 2002, Microsoft Corporation