Focus on the new economy and productivity

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Focus on the new economy and productivity

This issue looks at two aspects related to the broader topics of productivity and the new economy in the USA. Certainly, the recent terrorist attacks on the USA have led to noticeably higher risks to economic activity. This is making the job of forecasting economic growth anything but easy at present. It also impacts the assessment of productivity growth over the next few quarters. However, this publication focuses on long-term, structural aspects and should thus remain valid for some time. New economy: is the “productivity miracle” in the USA only a statistical phenomenon?

  • In the measurement of productivity growth, an important part is played by the price deflator used to calculate real output. While hedonic price indices are used in the USA, traditional methods are applied in Germany. Significant differences are registered above all in the development of computer prices on both sides of the Atlantic.
  • If German methods were used, GDP and productivity growth in the USA would have been considerable weaker since 1996 than recorded in the official statistics. The growth gap between the USA and Europe, as well as the technology gap, would then be smaller, and the controversial “new economy“ phenomenon would have to be called into question, at least in several areas.
  • Nevertheless, US productivity growth is still remarkable. Unlike in most other industrial countries it accelerated in the second half of the 1990s, which suggests the new economy does in fact exist. Productivity, wages & earnings: the new economy has an effect – but less than expected
  • While productivity and corporate earnings were closely correlated in the USA until the start of the 1990s, the connection between the two has since been much less pronounced and even seems to have reversed since the mid-1990s.
  • This is due above all to wage costs, which rose markedly faster than productivity. It is obvious that the link between changes in unemployment and rising wage costs, which is called into question by the advocates of the new economy, still exists.
  • As the new economy has led to a reduction not in the pricing power of the factor labour, but of the pricing power of companies because of intensified competition, the distribution of income has shifted to the benefit of employees.
  • Productivity growth remains a critical variable for long-time earnings prospects. However, it is as yet unclear whether the pace of productivity growth seen in the second half of the 1990s (2 ½% p.a.) can be maintained.

For the full analysis, see

Focus on the new economy and productivity. For more DB Research analyses see theDeutsche Bank Research website.  

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