The Industry Origins of the Second Surge of U.S. Productivity Growth

1

The Industry Origins of theSecond 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

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

Introduction

3

Two Surges in U.S. Productivity GrowthNonfarm Business Sector, 1988:Q4 - 2005:Q4

-1

0

1

2

3

4

5

6

1989:Q4 1991:Q4 1993:Q4 1995:Q4 1997:Q4 1999:Q4 2001:Q4 2003:Q4 2005:Q4

Per

cent

4-qtr Growth

Period Average

Note: All estimates are average annual percent growth. Data are from BLS (2/2/06).

2000:Q4-2005:Q4 = 3.11995:Q4-2000:Q4 = 2.51988:Q4-1995:Q4 = 1.5

4

• Where did the gains originate?

• Is this an information technology (IT) story?

• Is this likely to be permanent?

Questions

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

Basic Strategy

• Identify three groups of industries– IT-producing

– IT-using

– Other

• Compare productivity across industries

• Compare productivity across two surges

7

Productivity Issues

• Gross output vs. value-added

),,(),,,(

tLKgVtMLKfY

• Average labor productivity (ALP) vs. total factor productivity (TFP)

),,(/

/

MLKXYTFP

HYyALP

• Focus on gross output ALP– Gross output is more intuitive concept

– Direct IT impact on ALP via capital deepening

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

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

10

Changing Origins of the Aggregate Productivity Acceleration

-4

-2

0

2

4

6

-5 -3 -1 1 3 5

1995-2000 less 1988-1995

2000

-200

4 le

ss 1

995-

2000

Note: Figures are changes in average annual percent growth for 15 sectors that comprise the U.S. private economy. Productivity is value-added per hour. Circle size equals share of 2004 value-added.

Agriculture

Mining

Construction

Durables

Nondurables

Utilities WholesaleRetail

Trans

Information

FIRE

Prof & Bus Services

Ed Services

Entertainment

Other Services

21% of output 60% of output

14% of output5% of output

11

Changing Origins of the Aggregate Productivity Acceleration

-20

-15

-10

-5

0

5

10

15

20

25

-25 -20 -15 -10 -5 0 5 10 15 20

1995-2000 less 1988-1995

2000

-200

4 le

ss 1

995-

2000

Note: Figures are average annual percent growth for 60 private economy industries. Productivity is value-added per hour. Output share is of 2004 value-added.

17 industries; 31% of output




Funds, Trusts, and Other

Info and Data Processing

Computers & Electronics

Water Transport

Petroleum and Coal

Securities

Mining Support

Mining

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

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

Three Sets of Results

• Compare simple means across IT-classifications

• Econometric link between IT-classification and productivity

• Aggregate importance across IT-classifications

15

No. of 1995-00 less 2000-04 lessInd. Hours (%) 1988-1995 1995-2000 2000-2004 1988-95 1995-00

IT-Producing 4 3.6 5.2 7.6 10.6 2.4 3.0IT-Using 26 48.3 1.3 2.2 3.1 0.9 0.9Other 30 48.1 1.7 1.1 1.9 -0.6 0.8

2/16/2006 8:57

Changes in Labor Productivity by IT Classification

Notes: Productivity figures are average annual percent growth of labor productivity (value-added per hour). IT-producing industriesinclude Computer and Electronic Products; Publishing including Software; Information and Data Processing Services; Computer SystemDesign and Related Services, as defined by BEA. IT-using industries include non-IT-producing industries with a 1995 IT capital shareabove the median. Other industries include the remaining industries. Hours are as of 2004.

Productivity Acceleration

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

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

otherwiseITYinnsiveinteITifIT

otherwisePostBtifPost

ITPostITPostyd

YY

BB

tiYBYBti

0;1

0;1

ln ,,

18

Post1995 1.152*** 0.546 0.181 0.546

(0.302) (0.435) (0.423) (0.436)Post1995*IT1995 1.211** 2.059*** 1.292**

(0.584) (0.631) (0.587)

Weights? yesDrop IT-Producing? yes

Adjusted-R2 0.01 0.02 0.05 0.01Number of Obs. 720 720 720 672Number of Industries 60 60 60 56

2/28/2006 14:22

Gross Output

***, **, * indicate statistical significance at the 1%, 5%, and 10% level, respectively.

Table 4: Relative Labor Productivity Acceleration for IT-Intensive Industries

Notes: Dependent variable is average labor productivity growth for industry i in year t from 1988 to 2000. Value-added refersto value-added per total hours of all persons. Gross output refers to gross output per total hours of all persons. Post1995 equals 1

if t>1995, 0 otherwise. IT1995 equals 1 for industries with a 1995 IT capital share above the 1995 median, 0 otherwise.

Weighted regressions use value-added weights. Robust standard errors that allow for correlation within industries over time(clustering) are in parentheses.

1988-2000

19

Post1995 1.041*** 0.517 0.074 0.517

(0.249) (0.349) (0.551) (0.350)Post1995*IT1995 1.048** 1.682** 1.089**

(0.479) (0.655) (0.503)Post2000 0.421 0.360 0.036 0.360

(0.436) (0.387) (0.518) (0.387)Post2000*IT2000 0.123 -0.060 0.064

(0.873) (0.929) (0.839)

Weights? yes yesDrop IT-Producing? yes yes

Adjusted-R2 0.01 0.02 0.04 0.01 0.00 0.01 0.03 0.00Number of Obs. 960 960 960 896 960 960 960 896Number of Industries 60 60 60 56 60 60 60 56

2/28/2006 14:23



Notes: Dependent variable is labor productivity growth for industry i in year t from 1988 to 2004. Value-added refers to value-added per total

hours of all persons. Gross output refers to gross output per total hours of all persons. Post1995 equals 1 if t>1995, 0 otherwise. Post2000 equals 1

if t>2000, 0 otherwise. IT1995 equals 1 for industries with a 1995 IT capital share above the 1995 median, 0 otherwise. IT2000 equals 1 for

industries with a 2000 IT capital share above the 2000 median, 0 otherwise. Weighted regressions use value-added weights. Robust standard

errors that allow for correlation within industries over time (clustering) are in parentheses.

1988-2004

Gross Output

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 IT1995 and IT2000?

– No, highly correlated and only 4 industries change classification

• Estimate extended regression that allows two break-years

21

Extended Regression

• Allow break in both 1995 and 2000

– where ITY is either IT1995 or IT2000

• Results indicate that Other Industries did relatively better after 2000

tiYY

Yti

ITPostITPost

ITPostPostyd

,1995199519951995

2000200019951995,ln

22

Post1995 1.152*** 0.546 0.787*

(0.302) (0.436) (0.425)Post2000 -0.251 -0.067 -0.099

(0.516) (0.491) (0.499)Post1995*IT1995 1.211**

(0.584)Post2000*IT1995 -0.367

(1.033)Post1995*IT2000 0.730

(0.597)Post2000*IT2000 -0.302

(1.034)

Adjusted-R2 0.01 0.02 0.02Number of Obs. 960 960 960Number of Industries 60 60 60

2/28/2006 14:28


Table 7: Robustness Tests with Alternative Measures of IT-Intensity

Notes: Dependent variable is labor productivity growth for industry i in year t from 1988 to 2004. Value-

added refers to value-added per total hours of all persons. Gross output refers to gross output per total hours

of all persons. Post1995 equals 1 if t>1995, 0 otherwise. Post2000 equals 1 if t>2000, 0 otherwise. IT1995 equals

1 for industries with a 1995 IT capital share above the 1995 median, 0 otherwise. IT2000 equals 1 for industries

with a 2000 IT capital share above the 2000 median, 0 otherwise. Robust standard errors that allow for

correlation within industries over time (clustering) are in parentheses.

1988-2004

Gross Output

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 (IT1995 >median)

– 30 Other industries

24

Industry Sources of Aggregate ALP Growth

• Industry definitions

• Aggregate definitions

– where wi is nominal value-added share of industry i

HVALP

HH

VdwVd

V

ii

iii

/

lnln

iiVi HVALP /

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

iii

i

Vii

V

HdHdw

ALPdwALPd

lnln

lnln

26

No. of 1995-00 less 2000-04 lessIndustries Share Contribution Share Contribution Share Contribution 1988-1995 1995-00

Aggregate 60 1.31 2.26 3.06 0.95 0.81

Industry Groups 60 100.0 1.62 100.0 2.44 99.9 2.85 0.82 0.41IT-Producing 4 4.0 0.37 5.0 0.71 4.5 0.44 0.35 -0.27IT-Using 26 47.7 0.40 49.3 1.01 49.8 1.60 0.61 0.59Other 30 48.3 0.85 45.7 0.72 45.6 0.81 -0.13 0.09

Reallocation of Hours -0.31 -0.18 0.21 0.13 0.39

2/28/2006 14:47

Table 8: Decomposition of Aggregate Labor Productivity GrowthNotes: Decomposition of aggregate value-added productivity across industries. IT-producing industries include Computer and Electronic Products; Publishing including

Software; Information and Data Processing Services; Computer System Design and Related Services, as defined by BEA. IT-using industries include non-IT-producing

industries with a 1995 IT capital share above the 1995 median. Other industries include the remaining industries. Value-added productivity is defined as real value-added

per total hours of all persons. Industry contribution is weighted growth of productivity with nominal value-added weights for each year. Share is nominal value divided by

aggregate nominal value-added, multiplied by 100.

1988-1995 1995-2000 2000-2004

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

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The Industry Origins of theSecond 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

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

30

1995-00 less 2000-04 less$B Share 1988-95 1995-00 2000-04 1988-95 1995-2000

BLS Business Sector 1.46 2.63 3.74 1.17 1.11BLS Nonfarm Business Sector 1.46 2.49 3.73 1.03 1.25Private Industry Aggregate 10,251 100.0 1.25 2.24 3.02 0.99 0.77

Agriculture, forestry, fishing, and hunting 142 1.4 1.95 5.31 4.76 3.36 -0.55Mining 172 1.7 3.54 0.59 -2.99 -2.95 -3.58Construction 550 5.4 -0.32 -1.19 -0.66 -0.87 0.53Durable goods 824 8.0 3.57 7.69 6.61 4.13 -1.08Nondurable goods 596 5.8 2.26 1.78 4.40 -0.48 2.62Utilities 235 2.3 5.14 3.43 3.95 -1.70 0.52Wholesale trade 695 6.8 2.24 5.41 5.59 3.17 0.18Retail trade 790 7.7 2.69 4.66 5.07 1.97 0.40Transportation and warehousing 333 3.2 3.00 2.48 2.42 -0.52 -0.06Information 539 5.3 3.70 2.48 8.90 -1.23 6.42Finance, insurance, RE, rental, and leasing 2,413 23.5 1.77 1.83 1.98 0.07 0.14Professional and business services 1,352 13.2 -0.94 0.16 2.59 1.11 2.43Ed services, health care, social assist 909 8.9 -2.40 -1.22 0.48 1.18 1.70Arts, entertain, rec, accomm, and food services 424 4.1 0.65 1.12 0.99 0.46 -0.12Other services, except government 278 2.7 -0.31 -1.45 -0.05 -1.14 1.40

Mean 1.78 2.02 3.01 0.24 0.99Median 1.74 1.16 3.08 -0.58 1.92Weighted Mean 1.30 1.93 2.82 0.63 0.89

2/8/2006 16:56

Detailed Industries

Labor Productivity Growth across U.S. Sectors and Industries

Broad Sectors

2004 Value-AddedAverage Labor Productivity Growth Rate

Aggregates

31

1995-00 less 2000-04 less1988 1995 2004 1988-95 1995-00 2000-04 1988-95 1995-00

Private Industries 6.2 6.7 8.2 8.8 16.1 6.6 7.3 -9.4

Agriculture, forestry, fishing, and hunting 0.1 0.5 0.5 26.3 11.8 8.8 -14.4 -3.0Mining 0.9 1.1 0.7 7.7 8.9 0.5 1.2 -8.4Construction 0.4 5.7 10.3 47.3 26.9 8.4 -20.4 -18.5Durable goods 5.6 6.2 7.2 9.9 14.9 0.9 5.0 -14.0Nondurable goods 2.2 3.3 4.1 14.6 12.9 3.8 -1.8 -9.0Utilities 2.2 1.8 1.6 3.6 5.9 9.0 2.3 3.0Wholesale trade 9.6 12.1 12.9 12.6 17.1 7.8 4.5 -9.2Retail trade 4.1 4.0 4.0 10.0 13.4 10.3 3.5 -3.2Transportation and warehousing 3.5 6.2 12.3 13.2 20.9 8.6 7.8 -12.4Information 30.7 28.0 27.6 5.7 13.9 2.0 8.2 -11.9Finance, insurance, RE, rental, and leasing 9.0 8.2 7.3 10.6 20.6 7.1 10.0 -13.5Professional and business services 12.8 13.1 25.7 9.2 22.2 13.6 13.0 -8.6Ed services, health care, social assist 2.8 3.3 3.8 12.4 13.1 13.4 0.7 0.3Arts, entertain, rec, accomm, and food services 1.7 1.6 2.0 7.0 14.9 14.1 7.9 -0.8Other services, except government 1.6 2.2 2.1 12.7 11.0 6.7 -1.7 -4.3

Mean 7.9 7.9 10.1 12.5 15.3 6.8 2.8 -8.5Median 3.5 4.0 5.1 11.1 14.2 7.1 3.1 -7.1Weighted Mean 7.3 8.2 10.8 12.5 16.1 9.5 3.6 -6.6

2/28/2006 13:53

Table 2: IT Capital Share and Growth Rates for U.S. Sectors and Industries

Detailed Industries

Broad Sectors

Private Industries

Notes: IT capital includes computer hardware, computer software, and telecommunications equipment. IT capital shares are defined as the nominal value of IT capital as

a percentage of total nonresidential capital. Statistics for detailed industries are calculated across 60 observations for each period. Weighted estimates use share of

nominal value-added from the first year in each period. Data are from BEA.

Growth of IT CapitalIT Capital Share

32

Post1995 0.243 -0.623 -0.144 -0.622

(0.621) (0.947) (0.576) (0.948)Post1995*IT1995 1.732 1.695* 1.537

(1.220) (0.936) (1.133)

Weights? yesDrop IT-Producing? yes

Adjusted-R2 0.18 0.18 0.41 0.07Number of Obs. 720 720 720 672Number of Industries 60 60 60 56

2/28/2006 14:12

Value-Added



Notes: Dependent variable is average labor productivity growth for industry i in year t from 1988 to 2000. Value-added refersto value-added per total hours of all persons. Gross output refers to gross output per total hours of all persons. Post1995 equals 1

if t>1995, 0 otherwise. IT1995 equals 1 for industries with a 1995 IT capital share above the 1995 median, 0 otherwise.

Weighted regressions use value-added weights. Robust standard errors that allow for correlation within industries over time(clustering) are in parentheses.

1988-2000

33

Post1995 0.683 -0.251 -0.079 -0.251

(0.475) (0.685) (0.595) (0.686)Post1995*IT1995 1.868** 2.083*** 1.544

(0.920) (0.745) (0.948)

Post2000 1.132* 0.511 0.307 0.511

(0.601) (0.646) (0.512) (0.646)Post2000*IT2000 1.243 1.019 0.833

(1.198) (0.918) (1.113)

Weights? yes yesDrop IT-Producing? yes yes

Adjusted-R2 0.00 0.01 0.02 0.00 0.00 0.02 0.03 0.01Number of Obs. 960 960 960 896 960 960 960 896Number of Industries 60 60 60 56 60 60 60 56

2/28/2006 14:23



Notes: Dependent variable is labor productivity growth for industry i in year t from 1988 to 2004. Value-added refers to value-added per total

hours of all persons. Gross output refers to gross output per total hours of all persons. Post1995 equals 1 if t>1995, 0 otherwise. Post2000 equals 1

if t>2000, 0 otherwise. IT1995 equals 1 for industries with a 1995 IT capital share above the 1995 median, 0 otherwise. IT2000 equals 1 for

industries with a 2000 IT capital share above the 2000 median, 0 otherwise. Weighted regressions use value-added weights. Robust standard

errors that allow for correlation within industries over time (clustering) are in parentheses.

1988-2004

Value-Added

34

Post1995 0.243 -0.622 -0.429

(0.595) (0.909) (0.916)Post2000 0.990 0.837 0.762

(0.743) (0.900) (0.904)Post1995*IT1995 1.732

(1.171)Post2000*IT1995 0.305

(1.488)Post1995*IT2000 1.346

(1.179)Post2000*IT2000 0.457

(1.487)

Adjusted-R2 0.00 0.01 0.02Number of Obs. 960 960 960Number of Industries 60 60 60

2/28/2006 14:28


Table 7: Robustness Tests with Alternative Measures of IT-Intensity

Notes: Dependent variable is labor productivity growth for industry i in year t from 1988 to 2004. Value-

added refers to value-added per total hours of all persons. Gross output refers to gross output per total hours

of all persons. Post1995 equals 1 if t>1995, 0 otherwise. Post2000 equals 1 if t>2000, 0 otherwise. IT1995 equals

1 for industries with a 1995 IT capital share above the 1995 median, 0 otherwise. IT2000 equals 1 for industries

with a 2000 IT capital share above the 2000 median, 0 otherwise. Robust standard errors that allow for

correlation within industries over time (clustering) are in parentheses.

1988-2004

Value-Added

35

Other, -0.13

Other, 0.09Reallocation, 0.13

Reallocation, 0.39

IT-Using, 0.61

IT-Using, 0.59

IT-Producing, 0.35

IT-Producing, -0.27

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Pe

rce

nt `

First Surge (0.95) Second Surge (0.81)

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.

The Industry Origins of the Second Surge of U.S. Productivity Growth

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