The Productivity Paradox
Erol Taymaz
ECON 448
The Paradox
• We Love Computers
• Computers (Seem To) Hamper Productivity:
“we see computers everywhere but in the
productivity statistics.” (Solow-paradox)
2
The Paradox
ICT
investment
TFP
growth
3
Evidence of a Problem
2.5
2
1.5
1
0.5
0
1870-1913
1913-1950
1950-1973
1973-1993
Productivity Growth Slump, 1973 - present
4
Evidence of a Problem (part 2)
Value Added
• Productivity =
Person-Hour
Employed
• Downturn in Productivity Growth, not
Productivity
5
Evidence of a Problem (part 3)
• Massive Expenditures in Information
Technology
– 43% of capital budgets on hardware alone
• Has Replaced Other Forms of Capital
Investment
– but hasn’t performed as well
– some studies show a zero return on investment
for IT, vs. ~13% for traditional investments
6
Why (not)?
• Service Industries’ Output Hard to Quantify
– Banking: labor output = labor input
– Baily and Gordon: attempted to correct for poor
measurements, could only raise growth 0.2%
• Unmeasured Value
– What if lots of value added with no dollar increase?
• Cars now have airbags, better emissions, antilock
brakes...
– BLS figures uses strict dollar amounts
7
Excuses
• Too early to tell [Oliner and Sichel, 2000]
– Computer Hardware is only 2-5% of capital stock
– Technology still immature
– Insufficiently trained workforce
• Major innovations (PCs, the Internet, etc) have
been generated since the mid 1990s
8
Other Explanations
• What we observe is substitution of IT for
non-IT, there is no technical change
[Jorgenson and Yip, 2001]
• It is not a great innovation (compared to the
early 20th century) [Gordon, 2000]
9
Technical Change in IT
10
Technical Change in IT
Relative Pricesof ComputersandSemiconductors, 1977-2000
All price indexes are divided by the output price index.
1,000
Log Scale (1996=1)
100
10
1
0
0
1977
1982
1987
Computers
1992
Memory
Logic
1997
11
IT’s Share in Output Growth
Industry Contribution to Value Added
4.5
Average annual percentage growth rates, weighted by the value share.
4.0
Annual Contribution (%)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1977-1989
1989-1995
Non IT IT
1995-2000
12
IT’s Share in Output Growth
Industry Contributions to Value Added Growth, 1977-2000
Household
Wholesale Trade
Finance
Professional and Social Svcs.
Computers and Office Equipment
Retail and Eating
Real Estate (rental)
Electronic Components
Business Svc excl. Computer
Government excl. Education
Health private
Other Services
Agriculture
Communications
Computer Services
Government Education
Transportation
Food and Tobacco
Rubber and Plastic
Electricity
Government Enterprises
Instruments and Miscellaneous Mfg.
Communications Equipment
Chemicals
Printing and Publishing
Legal
Lumber, Wood, Furniture
Fabricated Metal
Other Transportation Equipment
Paper
Education, private
Construction
Textiles, Apparel, Leather
Other Electrical Mach
Insurance
Motor Vehicles
Stone, Clay, Glass
Coal Mining
Primary Metal
Non Energy Mining
Machinery excl. Computers
Petroleum Refining
Gas
Oil and Gas Mining
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
13
IT’s Share in Capital Input
Capital Input Contribution of Information Technology
Average annual percentage growth rates, weighted by income
2.50
Annual Contribution (%)
2.00
1.50
1.00
0.50
0.00
1977-1989
1989-1995
Non-IT Capital Services
IT Capital Services
1995-2000
14
IT’s Share in Capital Input
Industry Contributions toCapital Input Growth, 1977-2000
Household
Finance
Wholesale Trade
Business Svc excl. Computer
Professional and Social Svcs
Communications
Government excl. Education
Computer Services
Retail and Eating
Real Estate (rental)
Insurance
Machinery excl. Computers
Printing and Publishing
Government Enterprises
Transportation
Health private
Other Services
Electricity
Instruments and
Legal
Chemicals
Electronic Components
Government Education
Oil and Gas Mining
Communications Equipment
Food and Tobacco
Other Transportation
Construction
Gas
Fabricated Metal
Computers and Office
Other Electrical Mach
Motor Vehicles
Rubber and Plastic
Stone, Clay, Glass
Paper
Textiles, Apparel, Leather
Lumber, Wood, Furniture
Primary Metal
Agriculture
Education, private
PetroleumRefining
Non energy Mining
Coal Mining
-0.05
0.00
0.05
0.10
Note: Industries sorted by ITcapital contribution.
0.15
0.20
0.25
0.30
0.35
0.40
0.45
ITCapital Non-ITCapital
15
Sources of US Growth
Sourcesof U.S. EconomicGrowth
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1977-1989
1989-1995
1995-2000
-0.5
Labor
Non-ITCapital
ITCapital
TFP
16
Sources of US Growth
Sources of Growth in Industry Output, 1977-2000
Agriculture
Non Energy Mining
Coal Mining
Oil and Gas Mining
Construction
Lumber, Wood, Furniture
Stone, Clay, Glass
Primary Metal
Fabricated Metal
Machinery excl. Computers
Computers and Office
Other Electrical Mach
Communications Equipment
Electronic Components
Motor Vehicles
Other Transportation Equipment
Instruments and Miscellaneous
Food and Tobacco
Textiles, Apparel, Leather
Paper
Printing and Publishing
Chemicals
Petroleum Refining
Rubber and Plastic
Transportation
Communications
Electricity
Gas
Wholesale Trade
Retail and Eating
Finance
Insurance
Real Estate (rental)
Computer Services
Business Svc excl. Computer
Health private
Legal
Education, private
Professional and Social Svcs.
Other Services
Government Enterprises
Household
Government excl. Education
Government Education
-5
0
5
Intermediate
10
Labor
15
Capital
Productivity
20
25
17
Sources of Growth in DCs
Sources of Economic Growth by Country
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
1980- 1989- 19951989 1995 2000
US
1981- 1989- 19951989 1995 2000
1980- 1989- 19951989 1995 2000
Canada
UK
Labor
Non-IT Capital
1980- 1989- 19951989 1995 2000
France
IT Capital
1980- 1989- 19951989 1995 2000
1980- 1989- 19951989 1995 2000
Germany
Non-IT Productivity
Italy
1980- 1989- 19951989 1995 2000
Japan
IT Productivity
18
Substitution of IT for non-IT
19
Growth Accounting
• Oliner and Sichel (2000)
• Growth accounting
dY = acdKc + asdKs + amdKm + aodKo +
aL(dL + dq) + MFP
20
Table 1. Contributions to Growth of Real Nonfarm Business Output, 1974-99
1974-90
3.06
1991-95
2.75
1996-99
4.82
0.49
0.27
0.11
0.11
0.86
1.16
0.22
0.33
0.57
0.25
0.25
0.07
0.44
0.82
0.44
0.48
1.10
0.63
0.32
0.15
0.75
1.50
0.31
1.16
Income shares:
Hardware
Software
Communications eqmnt
Other capital
Labor hours
1.00
0.80
1.50
27.90
68.90
1.40
2.00
1.90
26.80
67.90
1.80
2.50
2.00
26.70
66.90
Growth rates of inputs
Hardware
Software
Communications eqmnt
Other capital
Labor hours
31.30
13.20
7.70
3.10
1.70
17.50
13.10
3.60
1.60
1.20
35.90
13.00
7.20
2.8021
2.20
Growth rate of output
Contributions from:
Information technology capital
Hardware
Software
Communications eqmnt
Other capital
Labor hours
Labor quality
Multifactor productivity
Table 2. Sectoral Contributions to Growth in Nonfarm Busines MFP
1974-90
0.33
1991-95
0.48
1996-99
1.16
0.12
0.08
0.13
0.17
0.16
0.12
0.20
0.23
0.26
0.39
0.50
0.49
Output shares
Computer sector
Semiconductor sector
Other nonfarm business
1.10
0.30
98.90
1.40
0.50
98.80
1.60
0.90
98.70
Growth of MFP
Computer sector
Semiconductor sector
Other nonfarm business
11.20
30.70
0.13
11.30
22.30
0.20
16.60
45.00
0.51
Growth rate of nonfarm business MFP
Contribution from each sector
Computer sector
Semiconductor sector
Other nonfarm business
Computer sector plus computer-related
semiconductor sector
22
Growth Accounting
• A sharp increase in MFP
• IT capital plays an important role; both its
use and production
• The impact will stay relatively strong for at
least the next few years
• Its share increased, so does its effect
23
Does the “New Economy” Measure
up to the Great Inventions of the
Past?
Gordon (2000)
24
A New Growth Accounting
25
Structural Acceleration in MFP
26
Structural Acceleration in MFP
• The “New Economy” does not reach to
other, non-IT sectors, that produce 80% of
output.
• 1995-1999 is too short. The MFP growth may
reflect cyclical effects.
27
Questions?
• Why was growth so slow after 1972?
• Why was growth so fast during the “Golden
Years” 1913-1972?
28
The Great Inventions of the 2nd IR
• Electricity
– Electric light and electric motor
– Electric chair
EM revolutionized manufacturing
• New consumer goods
• Air conditioning
29
The Great Inventions of the 2nd IR
• Internal combustion engine made possible
personal autos
ICE led to
•
•
•
•
Suburbs
Highways
Supermarkets
No rural isolation
30
The Great Inventions of the 2nd IR
• Chemicals, plastics, and pharmaceuticals
• New materials
• Longer life expectancy
– 1900-1950, increased by 0.72% per year
– 1950-1995, increased by 0.24% per year
31
The Great Inventions of the 2nd IR
• Entertainment, communication and information
•
•
•
•
•
•
•
Telegraph (1844)
Telephone (1876)
Phonograph (1877)
Popular photography (1880s)
Radio (1899)
Motion pictures (1880s)
TV (1911)
32
The Great Inventions of the 2nd IR
• Urban infrastructure
• Running water
• Indoor plumbing
• Urban sanitation
33
The Great Inventions of the 2nd IR
• Would you like to live in a house without a
flush toilet or the Internet?
34
What about the future?
• Do we expect an increase in MFP as a result of
the diffusion of the New Economy, the Internet,
etc?
No!
35
Why not?
• Diminishing
returns...
We already
received most of
the benefits of
these innovations.
36
Then, why firms invest in IT?
• Market share protection (Barnes and Noble vs
Amazon – a zero-sum game)
• Recreation of old activities rather than creation of
new activities (much internet content...)
• Duplication
• Use of business computers for consumption
purposes
37