Academic journal article Economic Perspectives

The Acceleration in the U.S. Total Factor Productivity after 1995: The Role of Information Technology

Academic journal article Economic Perspectives

The Acceleration in the U.S. Total Factor Productivity after 1995: The Role of Information Technology

Article excerpt

Introduction and summary

After the mid-1990s, labor and total factor productivity (TFP) accelerated in the United States. A growing body of research has explored the robustness of the U.S. acceleration, generally concluding that it reflects an underlying technology acceleration. This research, along with considerable anecdotal and microeconomic evidence, suggests a substantial role for information and communications technology (ICT). (1)

In this article, we briefly discuss the results of so-called growth accounting at the aggregate level. We then look more closely at the experience since the mid-1990s, when TFP accelerated. We look at data on which industries account for the TFP acceleration: Were the 1990s a time of rising total factor productivity growth outside of the production of ICT? Our industry data strongly support the view that a majority of the TFP acceleration reflects an acceleration outside of the production of ICT goods and software. (2) Even when we focus on arguably "well-measured" sectors (Griliches 1994; Nordhaus 2002), we find a substantial TFP acceleration outside of ICT production.

In particular, wholesale and retail trade show a substantial acceleration in TFP after the mid-1990s. This observation leads us, in the final part of the article, to discuss anecdotal evidence on the kinds of changes that have taken place in trade industries that might show up in measured TFP. Retailers implemented numerous organizational innovations, many of which required substantial industry, firm, and establishment reorganization; many of these innovations themselves relied centrally on innovations in ICT. Thus, ICT appears to play a nuanced role in the post-1995 pickup in productivity growth. In particular, the benefits of ICT may be subtle, affecting measured TFP in sectors that use ICT, as firms reorganize production in order to take advantage of the new technologies.

Before discussing numbers, why do we care about TFP growth? First, TFP growth allows us to increase the amount of output we produce--and, hence, how much we have available to consume today or invest for the future--without having to increase the resources (mainly capital and labor) used. Equivalently, we can produce the same output with fewer resources. This efficiency gain is clearly good for society. Second, economists generally argue that in the long run, TFP growth is the only means of getting sustained increases in standards of living, or output per worker. The reason is that tangible capital is generally thought to have a "diminishing marginal product." In other words, for a given number of workers, suppose we increase the quantity of capital. It is reasonable to expect that the marginal contribution of that capital falls, since we have to spread the same workers over more machines and structures. As a result, investment in equipment, software, and structures alone probably cannot lead to sustained increases in standards of living-as the marginal product of capital declines, the extra capital leads to little or no extra output.

A complementary way to look at the benefits of TFP growth is that one can show that TFP growth is identically equal to a weighted average of real wages and real payments to capital. If TFP growth rises, either real wages or real payments to capital rise. Thus, if we want to raise real wages without reducing returns to capital, we need TFP growth.

Aggregate growth accounting results

If the economy's output increases, then someone must have produced it. In our empirical work, we think of the economy as comprising a large number of finns and industries. But to fix ideas, we start by assuming that the economy has an aggregate production function that relates its overall real output Y to inputs of capital K and labor L. Output also depends on the level of technology, A. Output goes up if the economy's capital or labor input increases or if technology improves. …

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