March 20, 2000

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The Truth Is Out There: IT Boosts Productivity
Federal Reserve report credits technology with two-thirds of recent gains

By Marianne Kolbasuk McGee

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he Federal Reserve Board is about to confirm for the first time what many CIOs have known all along: IT significantly improves productivity. In a soon-to-be-released research report, the Federal Reserve estimates that the surge in productivity at U.S. businesses during the last five years can be attributed mostly to the use of IT-and more specifically to software and computers.

In the Federal Reserve's simplest definition, labor productivity is measured as output per hour at nonfarm operations. From 1995 to 1999, U.S. productivity broke a 25-year trend. From the early '70s to the mid-'90s, U.S. productivity grew sluggishly-at about 1.5% annually. But during the last five years, productivity growth suddenly jumped to about 2.66% annually. While the increase is only about 1%, the change is significant: It translates to about an extra $70 billion of productivity output per year, Federal Reserve economists say.

In the Federal Reserve report, titled "Resurgence of Growth in the Late 1990s: Is IT the Story?," Federal Reserve economists Stephen Oliner and Daniel Sichel calculate that nearly $50 billion, which is about two-thirds of the increased productivity, is due to the use of IT at U.S. businesses, as well as the production of computer products. By contrast, a similar 1994 study by Oliner and Sichel that examined the impact of IT on productivity during the early '90s showed no evidence of an effect.

Federal Reserve chairman Alan Greenspan in recent weeks has publicly begun crediting IT as a contributor to the nation's productivity surge, but the new Oliner and Sichel report is the Federal Reserve's first hard evidence that links IT with increased productivity.

CIOs aren't surprised by the Fed's findings. "I've been in IS since 1965, and I've seen the good, the bad, and the ugly," says Joe Durocher, former CIO at Hilton Hotels Corp., who's leaving the company later this month. "Over the last few years, the impact of IT on productivity has been profound."

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