Productivity lost in cyberspace

The internet promised a productivity boom, but that revolution has stalled over the past decade. New research suggests that internet usage can put downward pressure on productivity growth, leaving less time for work, other forms of leisure and sleeping. 

The average day for an office worker would be almost unrecognisable for a worker from the 1980s. And the worker from today would struggle without the convenience of Word, email and Wikipedia. Most people today probably don’t remember how to use the Dewey decimal system, let alone a real encyclopaedia.

Despite these changes, labour productivity has lagged in Australia over the past ten years, growing at a noticeably slower pace than in previous decades. The internet revolution (which initially focused on information and email) boosted productivity growth throughout the 1990s but that process has slowed to a crawl after we entered the 21^st century. Web 2.0, which focused on social networking, blogging and user-generated content, has been less successful as a productivity driver. Productivity growth has also slowed in most other developed economies.

Of course, we have come to recognise that the internet has a dual role for productivity. On one hand it makes day-to-day tasks more efficient but on the other hand it provides no shortage of distractions. The net effect on productivity is still positive but thousands of working hours are lost each year due to the triumvirate of productivity wasters: Facebook, Twitter and Youtube. Estimates for the United States suggest that time wasted on the internet costs the economy $US134 billion per year (around 0.8 per cent of nominal GDP).

The massive rise in internet usage has affected how we organise our time. Some internet activities are simply new ways to do old things, such as using Twitter to obtain news. Other internet activities reduce the time available to do other things. Watching cute kitten videos online, for example, is time not spent watching television or reading a book.

A recent research paper by economist Scott Wallsten via the National Bureau of Economic Research (‘What are we doing when we are not Online?’) estimates that in the United States each leisure hour spent online results in 16 less minutes working, 17 fewer minutes on other offline types of leisure and 7 less minutes sleeping. Perhaps most disturbing is that each hour online reduces thinking time by 2.5 minutes.

Our internet usage is often consumed while doing other activities, such as using your phone on the train or while watching television. This reduces the substitution effect between time spent online and other activities. However, generally our ability to multi-task is poor and internet usage comes at the expense of some other activity.

The ABS estimates that the average adult spends over four hours each day on recreation and leisure as a primary activity. But the average adult spends almost nine hours a day on leisure time if leisure is included as a secondary activity (such as reading this article when you are supposed to be working).

What does this all mean? What are the economic implications?

First, each hour spent enjoying leisure online results directly in 16 minutes of lost work and output. That is not a trivial loss of productivity, particularly in the younger age groups where internet usage is more widespread.

Second, internet usage is rising each year, increasing the time spent distracted from working and increasing the downward pressure on productivity. This is being driven not just by technology change but also demographic change, as older Australians – who use the internet less – leave the workforce.

Third, households consume around $84 billion worth of leisure and recreation activities annually in Australia (around 10 per cent of household consumption). A reallocation of that leisure time provides opportunities for some businesses and challenges for others. This social transformation has encouraged alternative business models, such as the digital distribution models favoured by the likes of iTunes and Netflix. 

The productivity slowdown is one of the more important challenges facing the Australian economy. With the mining boom slowing, productivity growth will once again become the most important long-run driver of economic growth. Wasteful internet is only one of several issues facing productivity growth but one that should be addressed to help maintain the strong economic growth we have experienced over the past two decades.