The Case of the Missing Productivity Growth: Or, does Information Technology Explain why Productivity Accelerated in the United States but not the United Kingdom?

Abstract

Solow's paradox has disappeared in the United States but remains alive and well in the United Kingdom. In particular, the U.K. experienced an information and communications technology (ICT) investment boom in the 1990s in parallel with the U.S., but measured total factor productivity has decelerated rather than accelerated in recent years. We ask whether ICT can explain the divergent TFP performance in the two countries. Stories of ICT as a 'general purpose technology' suggest that measured TFP should rise in ICT-using sectors (reflecting either unobserved accumulation of intangible organizational capital; spillovers; or both), but perhaps with long lags. Contemporaneously, investments in ICT may in fact be associated with lower TFP as resources are diverted to reorganization and learning. In both the U.S. and U.K., we find a strong correlation between ICT use and industry TFP growth. The U.S. results are consistent with GPT stories: the acceleration after the mid-1990s was broadbased-located primarily in ICT-using industries rather than ICT-producing industries. Furthermore, industry TFP growth is positively correlated with industry ICT capital growth in the 1980s and early 1990s. Indeed, as GPT stories would suggest, controlling for past ICT growth, industry TFP growth appears negatively correlated with increases in ICT usage in the late 1990s. A somewhat different picture emerges for the U.K. TFP growth does not appear correlated with lagged ICT investment. But TFP growth in the 1990s is strongly and positively associated with the growth of ICT capital services, while being strongly and negatively associated with the growth of ICT investment. If, as we argue, unmeasured investment in complementary capital is correlated with ICT investment, then this finding too is consistent with the GPT story. However, comparing the first and second halves of the 1990s, the net effect of ICT is positive, suggesting that ICT cannot explain the observed TFP slowdown. On the other hand, our results do suggest, albeit tentatively, that the U.K. could see an acceleration in TFP growth over the next decade.

Long term implications of the ICT revolution: Applying the lessons of growth theory and growth accounting

“…These studies all attributed a high proportion of the productivity resurgence to ICT, and found that most of the improvement was due to the use of ICT equipment by other industries (capital deepening) rather than to the production of ICT equipment by the ICT industries themselves. Similar studies have been published for the U.K. (Oulton (2002); Oulton and Srinivasan (2005); Marrano et al (2009)), and for the G7 (Schreyer (2000)); a U.S.-U.K. comparison is Basu et al (2004) and an EU-U.S. comparison is van Ark, O'Mahony and Timmer (2008). These all 2 Perron (1989) found that the Great Depression had a permanent effect on the level of U.S.…”

The Pre-Great Recession Slowdown in Productivity

“…Faster TFP growth in producing ICT products can, conceptually, raise aggregate TFP and labor productivity growth through several channels (see, for example, Basu, et al, 2003). Most directly, it raises aggregate TFP growth by raising it in the industries that produce ICT products.…”

“…However, non-ICT-producing U.S. industries also showed faster TFP growth in the late 1990s or early 2000s (e.g., Basu et al, 2003, andBosworth andTriplett, 2006). An important channel through which declining ICT prices can affect measured TFP is by fostering complementary innovations, such as business reorganization, to take advantage of an improved ability to manage information and communications.…”

“…See, for example, Greenwood and Yorokoglu (1997), Brynjolfsson and Hitt (2000), Basu et al (2003), and Brynjolfsson and McAfee (2014). Basu et al (2003) discuss some of the nuances of interpreting productivity movements in such a setting. In their model, there is unmeasured investment in reorganization, and an unmeasured service flow from the resulting intangible organizational capital.…”

How costly are restrictions on size?

“…There is evidence of substantial productivity growth in the service sector, and in the retail sector in particular. According to Basu et al (2003), the productivity growth in wholesale and retail trade between 1995 and 2000 was the second highest among all sectors in the US, second only to information technology producing sectors. Third, policies that affect the size of establishments are likely to be costly as large establishments account for a disproportionate fraction of output and employment.…”