1. 1 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.

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

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4. 4 Where did the gains originate? Is this an information technology (IT) story? Is this likely to be permanent? Questions

5. 5 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

6. 6 Basic Strategy Identify three groups of industries –IT-producing –IT-using –Other Compare productivity across industries Compare productivity across two surges

7. 7 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

8. 8 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

9. 9 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

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12. 12 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

13. 13 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

14. 14 Three Sets of Results Compare simple means across IT-classifications Econometric link between IT-classification and productivity Aggregate importance across IT-classifications

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16. 16 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

17. 17 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

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20. 20 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 IT 1995 and IT 2000 ? –No, highly correlated and only 4 industries change classification Estimate extended regression that allows two break-years

21. 21 Extended Regression Allow break in both 1995 and 2000 –where IT Y is either IT 1995 or IT 2000 Results indicate that Other Industries did relatively better after 2000

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23. 23 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 (IT 1995 >median) –30 Other industries

24. 24 Industry Sources of Aggregate ALP Growth Industry definitions Aggregate definitions –where w i is nominal value-added share of industry i

25. 25 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

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27. 27 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

28. 28 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.

29. 29 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

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35. 35 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.