1. The Early 21st Century U.S. Productivity Expansion is Still in Services Bethany Poller 10-11-10

2. Authors Barry P. Bosworth ◦ Former presidential advisor ◦ Expert on fiscal and monetary policy, economic growth, capital formation and Social Security Jack E. Triplett ◦ Has worked on issues relating to productivity analysis and price index and national accounts measurement ◦ Particularly interested in methodological issues in estimating price, output and productivity measures for goods/services that exhibit rapid quality and technological improvements

3. Previous work together “Services Productivity in the United States: New Sources of Economic Growth,” 2004 “Baumol’s Disease Has Been Cured: IT and Multifactor Productivity in U.S. Services Industries,” 2006 “The State of Data for Services Sector Productivity Measurement,” 2007, unpublished “Services productivity in the United States:Griliches’ Services Volume Revisited,” 2007

4. Introduction The 20th century ended with an unexpected surge in U.S. productivity growth. While earlier studies had focused on productivity growth in computer and semiconductor production and information technology (IT) factors, Triplett and Bosworth have looked at the productivity in services industries.

5. Productivity measurements Labor productivity (LP) measures the output per unit of labor input Multifactor productivity (MFP) measures the changes in output per unit of combined inputs: labor, materials and capital

6. Data The Bureau of Economic Analysis substantially improved its methodology for constructing its industry dataset Introduced the North American Industry Classification System (NAICS) These changes were introduced into the Bureau of Labor Statistics capital services measures, which provide the capital input measure for the MFP computations in this study. 57 industries: 23 goods industries and 34 services industries

7. Data continued The LP estimates for the aggregate of non-farm business used in the study differ somewhat from the published BLS series because of differences between what’s measured in BLS and BEA data and how. The researchers calculated data using parts of both sets of data. Data series show similar short-run trends: post- 2000 LP growth for non-farm business exceeded growth in 1995-2000 and growth has slowed since 2004

8. Productivity change in 1995-2000 period The major finding for pre- and post-1995 periods in authors’ book, that productivity growth in the services sector accelerated much more after 1995 than productivity in the goods sector, is confirmed, but the magnitudes of the estimates is considerably smaller using the new numbers.

9. Productivity Growth, direct, average annual rate of change 1987-951995-2000 Labor productivity Non-farm business1.42.5 Goods Sector2.43.0 Services Sector1.12.3 Multifactor Productivity Non-farm business0.91.6 Goods sector1.82.3 Services Sector0.51.3

10. Early 21 st century Services sector productivity growth has continued to grow in the beginning of the 21 st century, while goods sector LP and MFP both declined after 2000. Non-farm business LP and MFP growth rates have held up in the face of declines in the goods sector rates because the services sector has made up the gap.

11. Productivity Growth, direct, average annual rate of change 1987-951995-20002000-05 Labor productivity Non-farm business1.42.5 Goods Sector2.43.02.9 Services Sector1.12.32.4 Multifactor Productivity Non-farm business0.91.61.7 Goods sector1.82.31.9 Services Sector0.51.31.5

12. IT investment vs. MFP Investment boom in 1995-2000 (mostly in IT investment) IT investment contributed to the rise in services sector LP growth (1.0 points), but MFP made a larger contribution (1.3). The strong contribution of services MFP carried over to non-farm LP growth, contributing more than a third of it.

13. IT investment after 2000 After 2000, IT capital decreased and the only contributing factor that held non-farm business LP at the same level of growth was services MFP; all the other factors decreased. IT’s role in LP acceleration has been overemphasized. While it is an important factor, it is not the only one, and has actually contributed less than services MFP.

14. Resource reallocations Direct productivity measures vs. industry productivity measures Reallocations have typically reduced the direct productivity rates Few productivity researchers have paid attention to resource allocations and it hasn’t mattered much

15. LP by Sector and Reallocations, average annual percent change 1987-951995-2000 Non-farm business1.93.4 Labor reallocation-0.3-0.1 Intermediate input reallocation-0.2-0.8 Non-farm business (direct)1.42.5 Aggregated goods industries2.33.2 Labor reallocation-0.1-0.3 Intermediate input reallocation0.20.1 Goods sector (direct)2.43.0 Aggregated services industries1.83.5 Labor reallocation-0.30.1 Intermediate input reallocation-0.4-1.2 Services sector (direct)1.12.3

16. LP by Sector and Reallocations, average annual percent change 1995-20002000-05 Non-farm business3.42.5 Labor reallocation-0.1-0.4 Intermediate input reallocation-0.80.4 Non-farm business (direct)2.5 Aggregated goods industries3.22.2 Labor reallocation-0.3-0.1 Intermediate input reallocation0.10.7 Goods sector (direct)3.02.9 Aggregated services industries3.52.7 Labor reallocation0.1-0.5 Intermediate input reallocation-1.20.2 Services sector (direct)2.32.4

17. Conclusions Two forces drove the 1995-2000 productivity expansion: investment, much of it in IT, and MFP, much of it in services industries. Post-2000 productivity was driven again by investment, now not primarily in IT, and by productivity advance in services.

18. Conclusions Resource reallocations must also be considered to fully answer how productivity growth is changing.