The Problem of Measuring Productivity

Although the official productivity statistics are encouraging, they are far from perfect. They don’t do a very good job of accounting for quality, variety, timeliness, customer service, or other hard-to-measure aspects of output. While bushels of wheat and tons of steel are relatively easy to count, the quality of a teacher’s instruction, the value of more cereal choices in a supermarket, or the ability to get money from an ATM 24 hours a day is harder to assess.

Compounding this measurement problem is the fact that free digital goods like Facebook, Wikipedia, and YouTube are essentially invisible to productivity statistics. As the Internet and mobile telephony deliver more and more free services, and people spend more of their waking hours consuming them, this source of measurement error becomes increasingly important. Furthermore, most government services are simply valued at cost, which implicitly assumes zero productivity growth for this entire sector, regardless of whether true productivity is rising at levels comparable to the rest of the economy.

A final source of measurement error comes from health care, a particularly large and important segment of the economy. Health care productivity is poorly measured and often assumed to be stagnant, yet Americans live on average about 10 years longer today than they did in 1960. This is enormously valuable, but it is not counted in our productivity data. According to economist William Nordhaus, “to a first approximation, the economic value of increases in longevity over the twentieth century is about as large as the value of measured growth in non-health goods and services.”

Earlier eras also had significant unmeasured quality components, such as the welfare gains from telephones, or disease reductions from antibiotics. Furthermore, there are also areas where the productivity statistics overestimate growth, as when they fail to account for increases in pollution or when increased crime leads people to spend more on crime-deterring goods and services. On balance, the official productivity data likely underestimate the true improvements of our living standards over time.

Productivity doesn't take into account improved qualities of life, free digital content online, or other non-quantifiable qualitative improvements in our lives.