Between 1980 and 1995, total output per worker in the United States grew at the slowest rate of any G-7 country. Since then, however, the growth of U.S. labor productivity* has exceeded that of all other G-7 countries (see chart), as has the growth of U.S. real Gross Domestic Product. Increased growth of labor productivity explains fully half of the increase in real economic growth in the United States since 1995. And, by expanding the economy's productive potential, faster productivity growth has resulted in rising real wages and declining unemployment without significantly higher inflation.

So why the dramatic reversal of fortune for the United States? Many attribute it to the microchip--more specifically, to investment by firms in computers and information processing equipment and software. Federal Reserve Chairman Alan Greenspan has noted that "technological innovation, and in particular the spread of information technology, has revolutionized the conduct of business over the past decade and resulted in rising productivity growth." Economists estimate that one-half to three-quarters of the increase in trend labor productivity growth in the United States since 1995 can be attributed to rapid rates of investment in information and computer technology (ICT) equipment.

The spread of information technology noted by Chairman Greenspan and others has been encouraged by rapid declines in the prices of ICT equipment and software. Investment in ICT capital has increased productivity by placing more capital at the disposal of each worker--a process that economists refer to as "capital deepening." For example, with a computer and simple software, a records-keeper in a medical office can maintain many more patient files than he or she can using a hand-filing system. Similarly, the use of computerized robots on assembly lines has increased the number of automobiles and other goods assembled per worker employed in manufacturing industries. Computers are also used for designing and testing new products, operating precision equipment, managing inventory and personnel, and even for designing new computers. In many firms, investment in ICT capital permits increased production without additional labor. Indeed, in some cases, such investment enables firms to adopt more efficient production technologies by aiding, for example, in the design of more efficient production lines. Through such efficiency gains, output increases without commensurate increases in labor or capital inputs.

Computer technology is not new. The first electronic digital computer was built before World War II, the transistor dates from the late 1940s, and the silicon microchip from about 1970. Personal computers became widely used in offices in the 1980s. Yet, aggregate U.S. labor productivity growth declined after about 1970 and remained low for another 25 years, even as other important computer technology breakthroughs occurred. Economists were puzzled. Why did it seem that the impact of computer and information technology was observed "everywhere but in the productivity statistics," as Nobel-laureate economist Robert Solow once quipped? In fact, there often is a delay between the invention of a general-purpose technology and its impact on productivity. The next section takes a closer look at this phenomenon.