Shocking Technology: What Happens When Firms Make Large IT Investments?

Abstract

Many economists see information technology (IT) as central to understanding trends in productivity, labor's share of output, and employment, especially as new "artificial intelligence" (AI) technologies emerge. Yet it has been difficult to measure its effects. This paper takes a first look at the economic impacts of large custom software investment by firms-"IT shocks." Using a novel difference-indifferences methodology, we estimate the productivity of these shocks and the associated effects on revenues and employment and we explore the implications in terms of labor's share and other variables, including heterogeneous relationships by industry, AI use, and time. In our preferred models, IT shocks increase firm productivity by about 5%, followed by increases in revenue of 11% and in employment of 7% on average. However, employment growth following IT shocks is small or negative in mature industries; also, it has been slower in recent years, reducing job reallocation and aggregate productivity growth. Also, labor's share of revenue decreases and operating profits rise following IT shocks.

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