1. Ifo Institute for Economic Research ICT, SKILLS AND GERMAN INDUSTRY PRODUCTIVITY – The Interdependency of High-Skilled Labor and ICT Investments Thomas Strobel The 2008 World Congress on National Accounts and Economic Performance Measures for Nations, Washington D.C., 05-15-2008

2. Ifo Institute for Economic Research Motivation Labor productivity growth: –US experienced two productivity surges 1995 & 2000 –Germany experienced dual productivity declines Sources of US productivity surges: –ICT-producing and -using industries (e.g. Stiroh, 2002; Stiroh & Botsch, 2007) Germany: –Much weaker ICT (using/producing) effects, unable to offset demise of other industries (Eicher & Roehn, 2007, Eicher & Strobel, 2008)

3. Ifo Institute for Economic Research Motivation What if we look at the interaction of ICT and skills? What can we learn about German industry performance and productivity contributions? –Capital-skill complementarity: Griliches (1969)  extended to ICT capital-skill complementarity (e.g. Brynjolfsson et al., 2002) –Skill-biased technological change (e.g. Acemoglu, 1998, 2002, Aghion, 2002, and Hornstein et al. 2005, O’Mahony et al., 2002) Focus: High-skill intensity of industries –Share of high-skilled hours worked in total hours worked (  EU KLEMS) –High skilled = university graduates –Available for 14 industries, higher aggregates are imputed at lower sectoral levels of aggregation –Industry classification: High-skill-intensive are those who are above the median

4. Ifo Institute for Economic Research Growth Accounting Databases: German Capital Accounts Ifo DatabaseGroningen DatabaseEU KLEMS Database 52 industries (1991–2005) 26 industries (1980–2003) 66 industries (1970–2005) 3 ICT assets: – Software investments based on Ifo studies/surveys – Communications Equip. – Computers and Office Equip. Investments 3 ICT assets: – Software imputed by other countries’ shares in IT equipment – Communications Equip. – Computers investments only 3 ICT assets: – Software based on estimates by the German Institute of Economic Research – Communications Equip. – Computing investments only 9 Non-ICT assets 3 Non-ICT assets 5 Non-ICT assets ICT price adjustments: Groningen ICT price deflators (based on BEA) ICT prices based on BEA price deflators ICT prices provided by Federal German Statistical Office –Ifo Productivity Database (Roehn et al., 2007, available at http://faculty.washington.edu/te/growthaccounting/): Software investment shares in intangible assets and industry-level software investment based on Ifo study (Hermann and Mueller, 1997) and additional surveys conducted by the Ifo Investment Survey (1998, 1999, 2000). –Ifo Investment Survey: Follows the EU guidelines for harmonized business surveys (contains 70,000 German firms). It is established as an excellent leading indicator of German investment and is also incorporated in a number of other leading indicators (e.g. European Commission’s Economic Indicators of the Euro Zone).

5. Ifo Institute for Economic Research General productivity decline in 1991–2005 (Eicher & Roehn, 2007) –Decline in hours reallocation –Steady capital deepening –Weaker TFP growth post 2000 1991 – 19951996 – 20002001 – 2005 Market Economy Labor Productivity Growth (Value-Added) 2.54100%2.31100%1.94100% Contributions to Market Economy Labor Productivity: Labor Quality Growth.2811%.157%.2312% Hours Reallocation.9638%.7633%.2814% Capital Deepening1.0541%.8135%.9750% ICT Capital Deepening.2610%.3616%.2412% Non-ICT Capital Deepening.7931%.4520%.7338% Total Factor Productivity Growth.2610%.5825%.4624% Disaggregating German Labor Productivity: Growth Accounting (Jorgenson, Stiroh, and Ho, 2005)

6. Ifo Institute for Economic Research Disaggregating Labor Productivity: ICT Capital Deepening Accounting for High-Skill Intensity 1991 – 19951996 – 20002001 – 2005 Market Economy Labor Productivity Growth (Value-Added) 2.54100%2.31100%1.94100% Contributions to Market Economy Labor Productivity: ICT Capital Deepening.2610%.3616%.2412% High-Skill-Intensive Industries.083%.219%.147% High-Skill-Intensive Goods Prod..031%.042%.011% High-Skill-Intensive Services.052%.177%.137% Other Industries.187%.157%.105% ICT Capital Deepening –ICT capital deepening in other industries declined, high-skill intensive industries highest during 1996–2000 –ICT capital deepening strongest in high-skill-intensive services throughout all periods

7. Ifo Institute for Economic Research Disaggregating Labor Productivity: Total Factor Productivity Accounting for High-Skill Intensity 1991 – 19951996 – 20002001 – 2005 Market Economy Labor Productivity Growth (Value-Added) 2.54100%2.31100%1.94100% Contributions to Market Economy Labor Productivity: Total Factor Productivity.2610%.5825%.4624% High-Skill-Intensive Industries.042%-.29-13%.032% High-Skill-Intensive Goods Prod..031%.3013%.4322% High-Skill-Intensive Services.010%-.59-26%-.40-21% Other Industries.229%.8738%.4322% Total Factor Productivity –TFP growth quite low in high-skill-intensive industries due to weak performances of services industries –TFP divergence in high-skill-intensive manufacturing and services sectors post 1995 (bifurcation into positive and negative TFP growth contributions)

8. Ifo Institute for Economic Research Disaggregating Labor Productivity: Accounting for High-Skill Intensity Descriptive trends –High-skill-intensive industries:  Higher ICT capital deepening, but  lower TFP growth, especially due to services –Other industries:  Falling ICT capital deepening and  stronger TFP growth during 1995–2000, but weaker again post 2000 Formal testing (on a more disaggregate level) –Are there statistically significant differences from ICT capital deepening on productivity growth for high-skill-intensive compared to other industries? –Econometric testing approaches

9. Ifo Institute for Economic Research Isolating Industry Productivity Differences Estimation Strategy for Total Factor Productivity Growth Description of variables: –TFP = Total factor productivity –k ICT = ICT capital deepening (spillover effects) –HSINT = Dummy for high-skill-intensive industries ( j industry groups) –D = Time dummy ( t years) Econometric approaches: OLS and fixed effects regressions Separately estimated for goods producing and services industries (allowing for parameter heterogeneity)

10. Ifo Institute for Economic Research Isolating Industry Productivity Differences: OLS and Fixed Effects – TFP Growth (Goods Prod.) TFP growth differentials: High-skill intensive and other industries Total Sample (1991–2005)Split (>1995) ICT Capital Deepening0.00900.00100.00410.0150 [0.0265][0.0261][0.0257][0.0224] ICT  HS Intensive Ind.: Energy Mining & Quarrying-0.1703-0.1404--- [0.3517][0.3558]--- Office Machinery & Comp.-0.00120.00370.01790.2389*** [0.0347][0.0334][0.0326][0.0276] Other Elect. Equip. & Instr.-0.0798-0.1358-0.1455-0.2188 [0.1099][0.1326][0.1306][0.1402] Transport0.05050.05070.05570.1212*** [0.0681][0.0718][0.0621][0.0409] Furniture & Manuf. n.e.c.0.2256*0.2368*0.2402*0.2218* [0.1188][0.1257][0.1253][0.1289] Electricity, Gas & Water-0.0748-0.0936**-0.0828*-0.0372 [0.0440][0.0416][0.0434][0.0322] Observations392 364260 Adj. R 2 0.100.110.220.28 Time Dummiesyes Industry Dummies---yes Leverage Industries excluded--- yes Notes: Significance levels: * significant at 10%; ** significant at 5%; *** significant at 1%.

11. Ifo Institute for Economic Research Isolating Industry Productivity Differences: OLS and Fixed Effects – TFP Growth (Services) TFP growth differentials: High-skill intensive and other industries Total Sample (1991–2005)Split (>1995) ICT Capital Deepening-0.0157-0.0255-0.0527 [0.0201][0.0330][0.0539] ICT  HS Intensive Ind.: Financial Intermed. & Insurance0.2126***0.1986**0.1592** [0.0374][0.0693][0.0668] Real Estates0.05200.05850.0759* [0.0353][0.0534][0.0423] Business Services0.01220.01080.0241 [0.0270][0.0447][0.0557] Observations238 170 Adj. R 2 0.050.120.14 Time Dummiesyes Industry Dummies---yes Notes: Significance levels: * significant at 10%; ** significant at 5%; *** significant at 1%. Business Services could not reap productivity gains from ICT –Comprise around 16% of market economy value-added –Exhibit strong negative drag on services’ aggregate TFP growth

12. Ifo Institute for Economic Research Industry Contributions to Aggregate TFP Growth High-Skill-Intensive Industries: VA share 2005 (%) TFP Contributions 1992– 1995 1996– 2000 2001– 2005 Real Estate 15.5 0.21-0.030.14 Other Business Services 11.6 -0.11-0.58-0.23 Financial Intermediation 4.4 0.010.160.03 Motor Vehicles 4.1 0.00-0.130.16 Electricity, Gas 2.7 0.010.110.09 Rental & Leasing Services 2.4 -0.07-0.02-0.08 Electrical Apparatus n.e.c. 2.0 0.000.08-0.01 Computer and Related Activities 2.0 -0.040.00-0.05 Instruments 1.3 0.000.050.01 Insurance 1.2 0.03-0.12-0.11 Aux. Fin. & Ins. Intermediation 0.9 -0.02 -0.09 Radio, TV & Comm. Equipment 0.7 0.030.040.11 Other Transport Equipment 0.7 -0.030.070.04 Furniture & manufacturing n.e.c. 0.7 -0.030.01-0.01 Research and Development 0.5 0.010.02-0.02 Water Supply 0.4 -0.010.00 Office Machinery & Computers 0.2 0.030.110.06 Mining & Quarrying, ex. Energy 0.1 0.010.00-0.01 Energy Mining & Quarrying 0.1 0.03-0.03-0.02 Recycling0.10.00 -0.01

13. Ifo Institute for Economic Research Conclusion There is an ICT-skill complementarity for German industries –High-skill-intensive industries have higher ICT capital deepening, especially in the services sectors –ICT capital deepening in other (non-high-skill-intensive) industries is steadily declining ICT and skills enhanced industries’ productivity performance –There are productivity increasing effects from ICT capital deepening in high-skill- intensive goods producing and services industries, especially post 1995 (cp. TFP growth regressions) –Negative total factor productivity growth in high-skill-intensive services (cp. growth accounting exercises) is due to weak performance of Business Services –Potential explanations Measurement of services output Regulations might hinder ICT diffusion (Nicoletti et al., 2006) Share of high-skilled workers too low (e.g. brain drain)

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16. Ifo Institute for Economic Research Industry Classification: High-Skill Intensity High-Skilled Shares in Total Hours Worked 1991–19951996–20002001–20041991–-2004 1Agriculture, Forestry, Fishing3.603.303.423.44 Goods Producing Industries: 2Energy Mining & Quarrying6.828.128.527.77 3Food & Tobacco, Textiles1.962.402.702.33 4Other Manufacturing ♦ 5.446.247.016.17 5Electrical & Optical and Transport Equip.12.5013.9613.8213.40 6Manuf. n.e.c., Recy.; Elect., Gas & Water Supply6.828.128.527.77 7Construction3.603.884.303.90 Market Services: 8Wholesale & Retail Trade, Hotels & Catering3.003.203.573.24 9Transport and Communications3.343.223.723.41 10Financial Intermediation8.6010.2811.329.98 11Real Estates, Renting and Business Activities13.7413.7214.2713.89 Median5.446.247.016.17 Mean6.316.957.386.84

17. Ifo Institute for Economic Research Industry Classification: Detailed Disaggregation High-Skill-Intensive Industry Groups WZ2003 Classification (ifo Database) High-Skill-Intensive Goods Producing Industries: Energy Mining & QuarryingEnergy Mining and Quarrying Mining and Quarrying, ex. Energy Office Machinery & ComputersOffice Machinery and Computers Other Elect. Equip. & Instruments Electrical Apparatus n.e.c. Radio, TV and Comm. Equipment Instruments, Optics and Watches TransportMotor Vehicles Other Transport Equipment Furniture & manufacturing n.e.c.Furniture and Manufacturing n.e.c. Recycling Electricity, Gas, and Water SupplyElectricity, Gas Water Supply High-Skill-Intensive Services Sectors: Financial Intermediation & Insurance Financial Intermediation Insurance Auxiliaries Financial and Insurance Intermediation Real Estates Business Services Rental and Leasing Services Computer and Related Activities Research and Development Other Business Services

18. Ifo Institute for Economic Research Avg. Labor Productivity Growth: US vs. Germany

19. Ifo Institute for Economic Research Avg. Labor Productivity Growth: US vs. Germany

20. Ifo Institute for Economic Research Avg. Labor Productivity Growth: US vs. Germany