Catching Up with the Economy

In his Presidential Address five years ago, Zvi Griliches (1994) called attention to the severe difficulties that beset current attempts to measure the growth of labor productivity in the American economy. Because of these difficulties, it is likely that the true rate of economic growth is substantially underestimated. The root of the problem is the difficulty in measuring output in the service sector which now represents two-thirds of the economy. In such sectors as health care and information services, the contribution to gross domestic product (GDP) is measured by inputs rather than outputs, a procedure that makes it impossible to gauge accurately improvements in the quality of output. Thus, in the case of computers, which are transforming American society, economists have been unable, so far, to find a measurable contribution of computers to the rise in labor productivity—an astonishing paradox. I want to follow up on this problem of mismeasurements. My thesis is that the profession