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What Is the Productivity Paradox?

Carrieanne Larmore
Carrieanne Larmore

The productivity paradox is an economic explanation on how an increase in technology does not necessarily mean there will be an increase in productivity. The term was first used by Erik Brynjolfsson, a professor of management at the MIT Sloan School of Management, when he asserted that a correlation between IT improvements and productivity does not exist. He believed that the causes of the productivity paradox are that current measurements of productivity are inaccurate, private gains come at the expense of overall gains, time lags to realize gains and technology is mismanaged.

The productivity paradox is important because it reveals that investments in technology may not help a business or society become more productive. Statistical evidence shows that after a certain level of investment, productivity begins to plateau as further investments are made. This means that after a certain point, businesses should not rely on heavy investments in technology if it is determined to increase productivity. Economists also find that gross domestic product (GDP) does not necessarily increase as countries shift to become more technological. While it may be true that the productivity paradox exists, some argue that the paradox is due to inefficient means of measuring productivity or other causes not taken into account in the calculations.

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Businessman giving a thumbs-up

Methods for measuring productivity are limited and have noticeable weaknesses. Economists usually measure productivity by taking the percentage change in GDP and dividing it by the amount of labor per hour. The major weakness with this method is that it only considers technological improvements at the time the stats were gathered. Businesses tend to use the total factor productivity (TFP) method, which is calculated by subtracting productivity improvements from revenue per employee. This method's weakness is that it assumes technological investments improve productivity even when that is not the case.

The current methods of measuring productivity may not take into account certain variables that impact productivity due to technology, making gains appear lower. Another potential cause is by looking at net gains, since if one business experiences a gain at the expense of competitors the net gains will show no changes. It is also possible that gains appear later than expected, so they are not taken into account when measured. If management is not using the new technology to its full potential or has difficulties in managing its department then expected gains will not be realized.

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