Academic journal article National Institute Economic Review

Productivity Growth in Manufacturing, 1963-85: The Roles of New Investment and Scrapping

Academic journal article National Institute Economic Review

Productivity Growth in Manufacturing, 1963-85: The Roles of New Investment and Scrapping

Article excerpt

PRODUCTIVITY GROWTH IN MANUFACTURING, 1963-85: THE ROLES OF NEW INVESTMENT AND SCRAPPING The twin forces of investment in new and scrapping of old equipment are traditionally supposed to play a large part in explaining productivity growth. Scrapping cannot in practice be observed directly but can be inferred by estimating a vintage capital model. When this is done it is found that these forces do indeed have a substantial role to play in explaining differences between industries in productivity growth rates in the 1960s and 1970s, but not in the 1980s. The productivity improvement observed in most industries in the 1980s must therefore be ascribed largely to forces other than new investment and scrapping.

1. Introduction To what extent is the rate of growth of labour productivity explained by the twin forces of investment in new and scrapping of old equipment? This article seeks to answer this question for manufacturing, making use of a vintage capital model. The results to be discussed are for both total manufacturing and a large sample of manufacturing industries, from the 1960s to the 1980s. We shall be particularly concerned to see to what extent the improvement in productivity growth which has occurred in most industries in the 1980s can be explained by the forces under investigation.

Up to the mid 1960s, output, employment and productivity (output per person employed) in manufacturing displayed a simple pattern of business cycle fluctuations superimposed on a strong upward trend. After 1966, however, employment began to decline and has continued to do so, particularly in the 1980s. Output also fell after 1973 and particularly after 1979; despite some recovery since 1982 it has not regained the 1973 level. The growth rate of labour productivity tended to rise in each successive cycle, until 1973. There then followed a marked slowdown in the 1970s, followed by a recovery in the last sub-period (though the rate during 1979-86 is still less than that of the much despised Wilson--Heath era).

A number of writers (including Muellbauer, 1986) have suggested that the slowdown in the 1970s and the recovery in the 1980s can both be explained (at least in part) by a vintage capital approach. The vintage model sees new capital investment as the prime source of productivity growth in the long run: new technology must be embodied in new equipment. At any one time, there exists a stock of capital equipment of different ages. The productivity of labour on older, less technically advanced equipment is lower than that on newer equipment. In the event of an unexpected rise in demand older equipment will be retained in use for longer than anticipated; in extreme cases `mothballed' equipment may be brought back into use. The average age of the capital stock in use will rise and the observed growth of labour productivity, which is an average across all vintages of capital in use, will fall.(1) In the longer run, if the rise in demand persists, there will be more investment in new equipment and the growth rate of labour productivity will rise again. Conversely, if there is an unexpected fall in demand, older vintages of equipment may be scrapped prematurely. In this case the average age of capital equipment in use will fall and the growth rate of labour productivity will be observed to rise, as a higher proportion of the surviving labour force becomes concentrated on newer, more productive equipment. Note that according to the vintage capital model, it is always the oldest equipment which is scrapped first. In summary then, the growth of labour productivity is the result of the balance between two forces--first the rate at which new technology is introduced, measured by gross investment, and second, the rate at which older equipment, embodying inferior technology, is scrapped.

A possible explanation of the 1970s slowdown is that investment slowed down during this period, thus lowering the rate of introduction of new technology. …

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