Productivity Paradox: Implications and Challenges

Published 15 Feb 2017

Table of content


One theory that focuses on the relationship of productivity and information technology is the productivity paradox or the Solow computer paradox. The paradox was developed from the observation, if not aphorism, made by economist Robert Solow that, “You can see the computer age everywhere but in the productivity statistics,” (Greenan et al, 2002, p. 42). The objective of this paper is to evaluate the significance of the paradox in today’s industries. Conditions and constraints to support or contradict the productivity paradox will be determined from the studies and related literature. At the end of the study, the paper will be able to discuss the mechanics of the theory and determine its relevance today.

Understanding the Paradox

The productivity paradox states that as new information technology is introduced to the business process, there is a tendency for work productivity to diminish (McGovern, 2001). This contradicts the motivation for technology which is supposed to increase productive competencies. The observations to support the paradox were made based on process and productivity analysis made on the 1970’s focus automation of business processes which have not yielded productivity and at times have been seen as the cause of process lags (Cohen et al. 2004). If the paradox is true, then technological upgrading can become detrimental to productivity.

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One of the evidence to support the idea has been the decline in growth disproportionate with investments in information technology since the 1960’s which coincides with the advent of mechanization and digitization of business processes (Berman et al, 200). Also, computers and information processing equipment represent a very small percentage of capital stock and gross domestic products in general (Cohen et al, 2004). This relates to the founding premise of the paradox that cites is absence in productivity analysis or productivity statistics as originally observed by Solow (Greenan et al, 2004).

Developing Solutions

Advocates of information and technology development claim that the paradox was invalid, citing that technology was not the reason for the reduction in productivity but macroeconomic conditions and industrial developments as the main cause (Castells, 2000). By the late 1990’s, a significant number of economists such as Paul David, Dan Sichel and Erik Brynjolfsson have developed studies to determine the validity of the productivity paradox (Hempell, 2005). Explanations for the decline in productivity included the need for a technology to be prevalent before its true productivity can be measured. In such a scenario, then late adaptors of a technology, such as less technically driven economies, are less vulnerable to productivity paradoxes because by the time they gain access to technologies, there are already significant software and applications available.

For example, In David’s study, he concluded that the lag in productivity in computer automation develops from the lack of channels where the technology can be used. Consider voice over internet protocol communications (VOIP) from the perspective of information technology industries. The use of IP protocols was traditionally focused on data transmission but with the development of open source user interfaces (UI) such as Skype, VOIP has overtaken data as the primary focus in ICT development (Cohen et al, 2004).

According to Suter (2007) one key competency that has been developed by today’s information technology infrastructures is the recognition of the significance of learning curves and UI migration. In doing so, new technologies compensate for possible productivity paradoxes. Furthermore, Leibs (2005) suggests that the solution to productivity paradoxes has been through the development of process simulation technologies such as in the establishment of human resource information management protocols. These provide not only theoretical calculations productivity levels but also develop actual scenarios that have to be considered to eliminate lags in productivity which, as illustrated by Leibs, allows for adjustments to compensate for the change in operations.


The adaptation of new technologies, particular those dealing with information and processes, requires significant resources and long-term commitment. In addition, technology adaptation curves vary significantly and do not follow standards learning curves (Zabel, 2004).The debate on whether productivity paradoxes really do exist has become an issue as digitization becomes a priority for most industries. Similar to the mechanization and automation in the 1960’s, the level of productivity levels are being used to determine the cost effectiveness of these activities. If cost is the only concern, the claim of a productivity paradox can easily be accepted. However, there is a need for greater sensitivity to underlying factors in productivity analysis.

Assessment of productivity paradox in business in Scandinavia have shown that it has not become evident because of high levels of information literacy as well as access to applications that accommodate for culture, language and climate of local businesses (Dimovski et al, 2003). There are also no existing effective or universal measures of technical output even in insurance, accounting or finance where they are most prevalent, implying marginal variances in technology adaptation (Hulten et al, 2001). In conclusion, experience has shown that one of the most effective means of eliminating lags in productivity is in the development of technology infrastructures that consider users, industry demands development of channels and applications.


  • Berman, Evan M., Bowman, James S., West, Jonathan Page, and Van Wart, Montgomery R. (2000). Human Resource Management in Public Service: Paradoxes, Processes, and Problems. New York: Sage Publications, Inc
  • Castells, Manuel (2000).The Rise of the Network Society. New York: Wiley Cohen, Daniel, Garibaldi, Pietro, Scarpetta, Stefano (2004). The ICT Revolution: Productivity Differences and the Digital Divide. Oxford: Oxford University Press
  • Dimovski, Vlado and Skerlavaj, Miha (2003). Testing productivity paradox: the Slovenian case. Journal of the Academy of Business and Economics, February. Retrieved October 29, 2007.
  • Greenan, Nathalie, L’Horty, Yannick and Mairesse, Jacques (2002). Productivity, Inequality and the Digital Economy: A Transatlantic Perspective. Cambridge: MIT Press.
  • Hempell, Thomas (2005). Computers and Productivity: How Firms Make a General Purpose Technology Work.
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