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The Industry Origins of the Second Surge of U.S. Productivity Growth

The Industry Origins of the Second Surge of U.S. Productivity Growth. Kevin J. Stiroh* Federal Reserve Bank of New York May 2006. *These comments are the views of the author only and do not necessarily reflect those of the Federal Reserve System or the Federal Reserve Bank of New York.

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The Industry Origins of the Second Surge of U.S. Productivity Growth

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  1. The Industry Origins of theSecond Surge of U.S. Productivity Growth Kevin J. Stiroh* Federal Reserve Bank of New York May 2006 *These comments are the views of the author only and do not necessarily reflect those of the Federal Reserve System or the Federal Reserve Bank of New York.

  2. Introduction • U.S. economy enjoyed two surges of productivity growth, after 1995 and after 2000

  3. Questions • Where did the gains originate? • Is this an information technology (IT) story? • Is this likely to be permanent?

  4. Possible Explanations • Traditional IT effects • Delayed returns if adjustment costs/complementary investments • IT spillovers • Other technological progress or capital accumulation • Intangible capital (Corrado, Hulten, and Sichel (2006)) • Cyclical dynamics • Increased competitive pressures • Business press story

  5. Basic Strategy • Identify three groups of industries • IT-producing • IT-using • Other • Compare productivity across industries • Compare productivity across two surges

  6. Productivity Issues • Gross output vs. value-added • Average labor productivity (ALP) vs. total factor productivity (TFP) • Focus on gross output ALP • Gross output is more intuitive concept • Direct IT impact on ALP via capital deepening

  7. Data • BEA GDP-by-Industry • Gross output, value-added by industry • 65 industries for 1987-2004 • BLS Office of Occupational Statistics and Employment Projections • Total hours worked • 200 detailed industries for 1958-2004 • BEA Tangible Wealth Survey • Capital stock for 46 nonresidential business assets • IT = computer hardware, software, and telecomm equipment • 63 industries for 1987-2004

  8. Data • Two productivity measures • Value-Added / Hours • Gross Output / Hours • Consistent productivity and capital data for 60 industries for 1988-2004 • Industry classifications are an issue • SIC 1997 vs. NAICS 1997 vs. NAICS 2002

  9. Identifying IT-Intensive Industries • Many alternative decompositions • IT vs. Other – Baily and Lawrence (2001), Stiroh (2002) • Services vs. Other – Triplett and Bosworth (2004), Inklaar and van Ark (2006) • New economy industries – Nordhaus (2000) • Problems • None more correct than others • Subjective • Measure net effect

  10. Identifying IT-Intensive Industries • IT-Producing (BEA) • Computers and Electronics • Publishing including Software • Information and Data Processing Services • Computer System Design • IT-Using • IT capital share greater than 1995 median • Other • All remaining industries

  11. Three Sets of Results • Compare simple means across IT-classifications • Econometric link between IT-classification and productivity • Aggregate importance across IT-classifications

  12. Econometric Link between IT-Classification and Productivity • Compare IT-classification to productivity acceleration via a difference in difference estimate • IT is not everything, so view this is a signal of broader changes • Organizational change, human capital, intangible investment

  13. Difference in Difference Estimates • Basic regression • Key points • B defines break-year • Y defines year IT-intensity is determined •  is extra ALP growth after break-year for IT-intensive industries

  14. Why Do the 1995 and 2000 Results Differ? • Table 5 shows tighter linker link between IT and productivity acceleration during first surge • Did 2001 recession affect IT disproportionately? • Tech-bust and IT investment slowdown • Table 6 suggests not the whole story • Are industries classified differently based on IT1995 and IT2000? • No, highly correlated and only 4 industries change classification • Estimate extended regression that allows two break-years

  15. Extended Regression • Allow break in both 1995 and 2000 • where ITY is either IT1995 or IT2000 • Results indicate that Other Industries did relatively better after 2000

  16. Aggregate Importance across IT-Classifications • Decompositions • Domar (1961), Jorgenson et al. (1987), and Basu and Fernald (1997) for industry TFP • Baily, Hulten, and Campbell (1992), Haltiwanger (1997) for plant-level TFP • MGI (2001), Nordhaus (2001), Stiroh (2002) for industry value-added ALP • Decomposition by IT-classification • 4 IT-producing industries • 26 IT-using industries (IT1995 >median) • 30 Other industries

  17. Industry Sources of Aggregate ALP Growth • Industry definitions • Aggregate definitions • where wiis nominal value-added share of industry i

  18. Industry Sources of Aggregate ALP Growth • Decomposition of value-added productivity • Two effects • Direct productivity - aggregate ALP grows with industry ALP • Reallocation of hours - aggregate ALP rises if inputs reallocated to more productive industries

  19. Conclusions • First and second productivity surge appear fundamentally different • Evidence against IT spillover / adjustment costs story • Evidence for broader macro forces that might be temporary • Cyclical productivity • Increased competition and pressures • Consistent with recent productivity forecasts • Jorgenson, Ho and Stiroh (2006): 2.6% for private economy, 10-yrs • CBO (01/06): 2.4% for NFB, 10-yrs • OMB (02/06): 2.6% for NFB, trend • ERP (02/06): 2.6% for NFB, 6-yrs

  20. The Industry Origins of theSecond Surge of U.S. Productivity Growth Kevin J. Stiroh* Federal Reserve Bank of New York May 2006 *These comments are the views of the author only and do not necessarily reflect those of the Federal Reserve System or the Federal Reserve Bank of New York.

  21. Future Work • Examine other factors that might explain industry variation during second surge • Possible candidates • Intangible investment, e.g., R&D • Exposure to international competition • First surge as predictor of second surge • Strong demand

  22. Industry Contributions across Surges Note: Contribution of a group is the weighted growth of industry productivity using value-added weights, summed across industries in the group, and then differenced across periods. Reallocation is the difference in the growth of hours using value-added and hours weights, differenced across periods. First Surge is 1995-2000 less 1988-1995. Second Surge is 2000-2004 less 1995-2000. All values are percentage points.

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