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Note: Real labor compensation and rental rate of capital are deflated using the output deflator.
Source: Data obtained from the U.S. Department of Labor, Bureau of Labor Statistics website on Multifactor Productivity, at www.bls.gov/web/
prod3.supp.toc.htm.
The final two columns show that over time, labor The post-1995 productivity acceleration is, of
has benefited substantially from TFP growth, with course, of more than just historical interest, since many
real wages rising 1.9 percent per year. Real rental rates, aspects of future U.S. economic performance depend
by comparison, have been relatively flat—indeed, de- on whether this fast pace of growth continues. For
clining slightly over time. This finding—that techno- example, faster productivity growth means faster growth
logical progress leads to an increase in real wages but in income, which not only raises people’s standards
not an increase in real rental rates—is consistent with of living but also means that future tax receipts will
standard theories of economic growth. When TFP in- be higher, improving the government’s budget bal-
creases, the marginal products of labor and capital also ance. An important, and still unresolved, issue is the
increase; initially, this leads to higher payments to these extent to which this productivity acceleration reflects
factors as firms compete to hire (or, in the case of cap- primarily information technology—the most notable
ital, rent) them. But in the case of capital, over time example of new technology in recent years.
the increased marginal product of capital leads to a sub-
stantial increase in investment and the quantity of cap- Industry growth accounting results
ital, thereby driving the marginal product of capital The previous section looked at overall TFP
back down. (The increase in the capital stock, of course, growth for the economy. A striking finding was the
further raises the marginal product of labor, driving the pickup in TFP growth after 1995. In this section, we
wage up further.) Hence, over time, TFP increases raise ask the interesting follow-up question: Where did the
the real wage as well as the real quantity of capital. TFP growth take place in the economy? In particular,
The remainder of the table summarizes important was the pickup primarily centered in ICT producing
changes over time in the evolution of these series. or ICT using industries?
Several facts are striking. First, comparing the 1948– When we disaggregate the data to an industry
73 row with the 1973–95 row shows that TFP growth level, an important conceptual question arises about
and output growth slowed markedly after 1973. In terms how to treat intermediate inputs (purchased goods
of factor payments, the slowdown in wage growth and services such as raw materials, parts, consultants,
was particularly marked. By contrast, there is little advertising, and so forth) and, as a result, how to mea-
evidence that factor quantity growth changed in any sure output. For example, suppose the economy pro-
particularly striking way. duces bread. A farmer grows the wheat and sells it to
Second, after 1995, TFP growth and output growth a miller; the miller produces flour and sells it to a baker;
surged. In the BLS data, although TFP growth did and the baker bakes bread and sells it to a household.
not quite reach its pre-1973 levels, output growth ex- At an economy-wide level, we do not want to mea-
ceeded its earlier rates. Input growth rates rose—with sure total output by summing the value of the wheat
a particularly notable pace of capital growth (nearly plus the value of the flour plus the value of the bread.
5.4 percent per year). Real wage growth rose at a We just want to count the value of the final loaves of
pace only slightly below its pre-1973 growth rate of bread. An alternative way to measure that final output
nearly 2.8 percent; but real rental growth turned from is by summing the so-called value added of the farmer,
a slight negative to a sharp negative. the miller, and the baker—that is, the value of their
measured TFP. This anecdotal evidence may provide A difficult issue that national accountants have
insights into the underlying sources of TFP growth.12 to struggle with is how to measure real, or inflation-
The Bureau of Economic Analysis—the source for adjusted, output. If there are no changes in the quali-
our data—defines retail trade as a distribution service ty of goods sold, then simply recording the value of
of goods to individuals.13 According to the BEA’s gross sales and the prices charged makes it relatively easy
domestic product-by-industry measure, total output to measure real output. However, when there are sub-
in retail trade is measured by retail sales, excluding stantial changes in quality—for example, retailers stock
the value of the actual good sold and taxes collected a wider variety of products so you are more likely to
by individual retail stores. Thus, value added would find what you want; or the Internet makes it easy to
be these distribution services minus the contribution buy goods at home if, in fact, you hate fighting crowds
of the electricity, utilities, cleaning services, and other at the mall—it becomes much more difficult to prop-
intermediate inputs.14 erly measure real output. For example, some people
have argued that the substantial use of information
APPENDIX
Framework for traditional growth accounting function in equation A1, we can be more precise
If the economy’s output increases, then someone must about the role of technological innovations versus
have produced it. In our empirical work, we think of input increases in explaining output growth. To begin,
the economy as comprising a large number of firms we assume that the production function has constant
and industries. But to fix ideas, we start by assuming returns to scale in inputs. This assumption implies
that the economy has an aggregate production function that if we change all inputs by a given factor, then
that relates its overall real output Y to inputs of capi- output changes by the same proportion; for example,
tal K and labor L. Output also depends on the level of if we increase capital and labor inputs by 10 percent
technology, A. Output goes up if the economy’s capi- each, then output also rises by 10 percent.
tal or labor input increases or if technology im- In the U.S. example, of course, inputs did not in-
proves. We write this function as: crease proportionately—capital input grew much
faster. So how much should we weight each factor?
A1) Y = A × F(K,L). Suppose labor input, say, rises by a small amount dL,
while nothing else changes. The resulting increase in
The relationship in equation A1 is relatively in- output, which we denote dY, is approximately equal
tuitive. For example, the United States produces to the following:
more output than India each year, even though India
has a much larger labor force (and many more em- dY = MPL × dL.
ployed workers) than the United States. Equation A1
suggests that either the United States has more capi- MPL is the marginal product of labor, that is, it tells us
tal than India, or the United States is more efficient at how much extra output one gets from a little bit more
converting inputs into output (that is, A is higher in labor input. (In calculus terms, MPL ≡ ∂Y/∂L.) By di-
the United States), or (most likely) both. viding through by Y and rearranging, one finds:
More closely related to the focus of this paper,
U.S. nonfarm business output increased more than dY MPL × L dL
sixfold between 1948 and 2000; equation A1 says = L .
Y Y
that this reflects increases in capital, labor, or technology.
According to BLS data, over this same time period,
total labor input (adjusted for changes in the compo- The left-hand side, dY/Y, is the percent change in out-
sition of the labor force) increased two and a half put—that is, the actual change dY divided by the lev-
times, while capital input increased about eightfold. el Y. Similarly, dL/L is the percent change in labor
But what was the role of technological innova- input. In words, if labor input rises by, say, 10 percent
tions? With a few assumptions about the production ((dL/L) = 10 percent), then output growth equals an
elasticity [MPL × L/Y] times 10 percent.
2
To show this, consider the accounting identity in equation A2 again, but think of it as applying at an economy-wide level rather than a
firm-level; this is just the national accounts identity, which tells us that total income equals total output. Taking the total differential—
allowing all prices and quantities to change—yields:
With considerable rearrangement, one finds that TFP growth equals a weighted average of real factor prices:
dY dK dL dW dP dR dP
− (1 − sL ) − sL = sL − + (1 − sL ) − .
Y K L W P R P
NOTES
1
See Jorgenson (2001) or Jorgenson, Ho, and Stiroh (2002) for re- and exclude several service sectors where consistent input or out-
views of the empirical literature on the productivity acceleration put data are unavailable: holding and other investment offices, so-
and the role of information technology. We discuss this literature cial services, membership organizations, and other services. The
in greater detail later. dataset, along with further details on its construction, is available
on request.
2
In our view, more studies than not find a widespread acceleration
6
in technology, for example, Basu, Fernald, and Shapiro (2001), With Törnqvist aggregation, aggregate TFP growth is a weighted
Baily and Lawrence (2001), Bosworth and Triplett (2002), Coun- average of industry gross-output TFP growth, where the so-called
cil of Economic Advisers (2003), Jorgenson, Stiroh, and Ho (2002), Domar weights equal nominal industry gross output divided by
Nordhaus (2002), Oliner and Sichel (2000), and Stiroh (2002a, aggregate value added; the weights thus sum to more than one. In
2002b). Gordon (2003) remains a skeptic. continuous time, this is equivalent to first converting gross-output
residuals to value-added terms by dividing by one minus the in-
3
See, for example, Basu and Fernald (2001). termediate share and then using shares in nominal value added. (In
discrete time, using average shares from adjacent periods, they
4
The productivity literature (for example, Jorgenson, Gollop, and are approximately equivalent.) Basu and Fernald (2001) discuss
Fraumeni, 1987) tends to prefer to use gross-output residuals, with this aggregation and its extension to the case of imperfect compe-
explicit accounting for intermediate inputs. This literature then tition; see also Oulton (2001).
uses “Domar weights” (the ratio of industry gross output to aggre-
7
gate value added) to get aggregate residuals. Apart from approxi- As noted earlier, the acceleration exceeds that in product-side
mation error, this is equivalent to estimating industry value-added BLS data shown in table 1.
residuals and then using value-added weights. Thus, our approach
8
of focusing on value added is conceptually equivalent to the stan- The BEA industry data come from the income-side of the national
dard gross-output approach. If the assumptions of constant returns accounts, which, as is well known, accelerated faster than the ex-
and perfect competition do not hold, however, then not only does penditure side in the late 1990s. See Bosworth and Triplett (2002)
TFP not properly measure technology, but for econometric analy- for an extensive discussion of the difference between TFP growth
sis the use of value added versus gross output may make a differ- calculated with industry data and with the aggregate BLS data.
ence; for a discussion of this point, see Basu and Fernald (1995, 2001).
9
We would note that Jorgenson, Ho, and Stiroh (2002), who use
5
We thank Jack Triplett for sending us their industry dataset that output data from the BLS Office of Employment Projections, do
merged the BEA and BLS data. Basu, Fernald, Oulton, and Srinivasan not find as important a contribution from the trade sectors.
(2003) updated the BEA data to incorporate November 2002 NIPA
industry revisions and also to remove owner-occupied housing. 10
The CEA methodology is very similar to that of Oliner and Sichel
The BEA labor compensation data do not include proprietors or (2002), who report no TFP acceleration outside of ICT production.
the self-employed, so we follow Bosworth and Triplett in using But Oliner and Sichel discount their finding on this score, since their
BLS data that correct for this. We thank Larry Rosenblum at the method takes non-ICT TFP as a residual. Since the Oliner-Sichel
BLS for sending us unpublished industry hours data, which make end-point is a recession year, 2001, they point out that any cycli-
adjustments for estimated hours worked by non-production and cal effects on productivity are forced to show up in non-ICT TFP.
supervisory employees as well as the self-employed. We updated In addition, the CEA measure of labor productivity is a geometric
the BLS capital data from www.bls.gov/web/prod3.supp.toc.htm average of income- and product-side measures of output per hour.
(downloaded December 2002). We follow Bosworth and Triplett
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