ECONOMICS DEPARTMENT WORKING PAPERS NO. 261

Transcription

1 Unclassfed ECO/WKP(2000)34 Organsaon de Coopéraon e de Développemen Economques OLIS : 31-Oc-2000 Organsaon for Economc Co-operaon and Developmen Ds. : 09-Nov-2000 Englsh ex only ECONOMICS DEPARTMENT ECO/WKP(2000)34 Englsh ex only Unclassfed RAISING THE SPEED LIMIT: US ECONOMIC GROWTH IN THE INFORMATION AGE ECONOMICS DEPARTMENT WORKING PAPERS NO. 261 by Dale W. Jorgenson and Kevn J. Sroh Cancels & replaces he same documen: dsrbued 20-Oc-2000 Mos Economcs Deparmen Workng Papers begnnng wh No. 144 are now avalable hrough OECD s Inerne Web se a hp://ww.oecd.org/eco/eco Documen comple dsponble sur OLIS dans son forma d orgne Complee documen avalable on OLIS n s orgnal forma

2 ABSTRACT/RÉSUMÉ Ths paper examnes he underpnnngs of he successful performance of he US economy n he lae 1990s. Relave o he early 1990s, oupu growh has acceleraed by nearly wo percenage pons. We arbue hs o rapd capal accumulaon, a surge n hours worked, and faser growh of oal facor producvy. The acceleraon of producvy growh, drven by nformaon echnology, s he mos remarkable feaure of he US growh resurgence. We consder he mplcaons of hese developmens for he fuure growh of he US economy. JEL classfcaon: O3, O4 Keywords: Producvy, economc growh, capal sock **** Ce documen examne les faceurs qu on conrbués aux rès bonnes performances de l économe amércane à la fn des années 90. Par rappor au débu des années 90, le aux de crossance a augmené de près de deux pons de pourcenage. Nous arbuons cec à la crossance accrue du capal, une augmenaon mporane des heures ravallées e une crossance plus rapde de la producvé mulfacorelle. Cee accéléraon de la crossance de la producvé, poussée par les echnologes de l nformaon, es l aspec le plus remarquable de la remonée de la crossance amércane. Nous prenons en consdéraon les mplcaons de ces développemens pour la crossance fuure de l économe amércane. Classfcaon JEL : O3, O4 Mos-clés :producvé, crossance économque, sock du capal Copyrgh: OECD 2000 Applcaons for permsson o reproduce or ranslae all, or par of, hs maeral should be made o: Head of Publcaons Servce, OECD, 2 rue André-Pascal, PARIS CEDEX 16, Pars. 2

3 TABLE OF CONTENTS RAISING THE SPEED LIMIT: US ECONOMIC GROWTH IN THE INFORMATION AGE...5 I. Inroducon...5 II. The recen US growh experence...7 a) Sources of economc growh...8 ) Producon possbly froner...8 ) Compuers, sofware, and communcaons equpmen...9 b) Oupu...10 c) Capal sock and capal servces...11 d) Measurng labor servces...13 e) Quanfyng he sources of growh...14 ) Oupu growh...15 ) Average labor producvy growh...17 ) Toal facor producvy growh...18 f) Alernave growh accounng esmaes...18 g) Decomposon of TFP esmaes...20 III. Seng he speed lm...21 a) A bref revew of forecas mehodologes...21 b) CBO s growh projecons...22 c) Evaluang CBO s projecons...24 IV. Indusry producvy...25 a) Mehodology...25 b) Daa sources...27 c) Emprcal resuls...27 ) Sources of ndusry growh...27 ) Comparson o oher resuls...30 ) Domar aggregaon...31 V. Conclusons...32 Appendx A - Esmang oupu...35 Appendx B - Esmang capal servces...35 ) Capal servces mehodology...35 ) Invesmen and capal daa...39 Appendx C - Esmang labor npu...41 ) Labor npu mehodology...41 ) Labor daa...43 Appendx D - Esmang ndusry-level producvy...43 Appendx E - Exrapolaon for BIBLIOGRAPHY...45 TABLES AND FIGURES

4 Tables 1. Average Growh Raes of Seleced Oupus and Inpus 2. Growh n US Prvae Domesc Oupu and he Sources of Growh, The Sources of ALP Growh, Impac of Alernave Deflaon of Sofware and Communcaons Equpmen on he Sources of US EconomcGrowh, Informaon Technology Decomposon of TFP Growh for Alernave Deflaon Cases, Growh Raes of Oupu, Inpus and Toal Facor Producvy Comparson of BLS, CBO and Jorgenson-Sroh Value-Added and Gross Oupu by Indusry 8. Sources of US Economc Growh by Indusry, Chars 1. Relave Prces of Informaon Technology Oupus, Oupu Shares of Informaon Technology, Inpu Shares of Informaon Technology, Sources of US Economc Growh, Oupu Conrbuon of Informaon Technology, Oupu Conrbuon of Informaon Technology Asses, Inpu Conrbuon of Informaon Technology, Inpu Conrbuon of Informaon Technology Asses, Sources of Labor Producvy Growh, TFP Decomposon for Alernave Deflaon Cases 11. Indusry Conrbuons o Aggregae Toal Facor Producvy Growh, Appendx ables A-1 Prvae Domesc Oupu and Hgh-Tech Asses B-1 Invesmen and Capal Sock by Asse Type and Class B-2 Toal Capal Sock and Hgh-Tech Asses B-3 Toal Capal Servces and Hgh-Tech Asses C-1 Labor Inpu 4

5 RAISING THE SPEED LIMIT: US ECONOMIC GROWTH IN THE INFORMATION AGE Dale W. Jorgenson and Kevn J. Sroh 1 I. Inroducon 1. The connued srengh and valy of he US economy connues o asonsh economc forecasers. 2 A consensus s now emergng ha somehng fundamenal has changed wh new economy proponens ponng o nformaon echnology as he causal facor behnd he srong performance of he US economy. In hs vew, echnology s profoundly alerng he naure of busness, leadng o permanenly hgher producvy growh hroughou he economy. Skepcs argue ha he recen success reflecs a seres of favorable, bu emporary, shocks. Ths argumen s buressed by he vew ha he US economy behaves raher dfferenly han envsoned by new economy advocaes Whle producvy growh, capal accumulaon, and he mpac of echnology were once reserved for academc debaes, he recen success of he US economy has moved hese opcs no popular dscusson. The purpose of hs paper s o employ well-esed and famlar mehods o analyze mporan new nformaon made avalable by he recen benchmark revson of he US Naonal Income and Produc Accouns (NIPA). We documen he case for rasng he speed lm for upward revson of nermedaeerm projecons of fuure growh o reflec he laes daa and rends. 3. The lae 1990s have been exceponal n comparson wh he growh experence of he US economy over he pas quarer cenury. Whle growh raes n he 1990s have no ye reurned o hose of he golden age of he US economy n he l960s, he daa noneheless clearly reveal a remarkable ransformaon of economc acvy. Rapd declnes n he prces of compuers and sem-conducors are well known and carefully documened, and evdence s accumulang ha smlar declnes are akng place n he prces of sofware and communcaons equpmen. Unforunaely, he emprcal record s serously 1. Jorgenson: Deparmen of Economcs, Harvard Unversy, [email protected]., (617) Sroh: Bankng Sudes Funcon, Federal Reserve Bank of New York, [email protected], (212) We are ndebed o Mun Ho for hs commens and asssance wh he ndusry and labor daa. We are also graeful o Bob Arnold of CBO for helpful commens and dscussons of he CBO s resuls and mehods and Bruce Grmm and Dave Wasshausen of BEA for deals on he BEA nvesmen daa and prces. Our hanks are due o Erwn Dewer, Rober Gordon, Seve Olner, Dan Schel, as well as semnar parcpans a he Brookngs Panel on Economc Acvy, he Federal Reserve Bank of New York, and he Federal Reserve Board for helpful commens and advce. Dave Fore provded excellen research asssance. The vews expressed n hs paper are hose of he auhors only and do no necessarly reflec he vews of he Federal Reserve Bank of New York or he Federal Reserve Sysem. 2. Labor producvy growh for he busness secor averaged 2.7% for , he four fases annual growh raes n he 1990s, excep for a emporary jump of 4.3% n 1992 as he economy exed recesson (BLS (2000)). 3. Sroh (1999) crques alernave new economy vews, Trple (1999) examnes daa ssues n he new economy debae, and Gordon (1999b) provdes an ofen-ced rebual of he new economy hess. 5

6 ncomplee, so much remans o be done before defnve quanave assessmens can be made abou he complee role of hese hgh-ech asses. 4. Despe he lmaons of he avalable daa, he mechansms underlyng he srucural ransformaon of he US economy are readly apparen. As an llusraon, consder he ncreasng role ha compuer hardware plays as a source of economc growh. 4 For he perod 1959 o 1973, compuer npus conrbued less han one-enh of one percen o U.S. economc growh. Snce 1973, however, he prce of compuers has fallen a hsorcally unprecedened raes and frms and households have followed a basc prncple of economcs hey have subsued owards relavely cheaper npus. Snce 1995 he prce declne for compuers has acceleraed, reachng nearly 28% per year from 1995 o In response, nvesmen n compuers has exploded and he growh conrbuon of compuers ncreased more han fve-fold o 0.46 percenage pons per year n he lae 1990s. 5 Sofware and communcaons equpmen, wo oher nformaon echnology asses, conrbued an addonal 0.29 percenage pons per year for Prelmnary esmaes hrough 1999 reveal furher ncreases n hese conrbuons for all hree hgh-ech asses. 5. Nex, consder he acceleraon of average labor producvy (ALP) growh n he 1990s. Afer a 20-year slowdown dang from he early 1970s, ALP grew 2.4% per year for , more han a percenage pon faser han durng A dealed decomposon shows ha capal deepenng, he drec consequence of prce-nduced subsuon and rapd nvesmen, added 0.49 percenage pons o ALP growh. Faser oal facor producvy (TFP) growh conrbued an addonal 0.63 percenage pons, largely reflecng echncal change n he producon of compuers and he resulng acceleraon n he prce declne of compuers. Slowng labor qualy growh rearded ALP growh by 0.12 percenage pons, relave o he early 1990s, a resul of exhauson of he pool of avalable workers. 6. Focusng more specfcally on TFP growh, hs was an anemc 0.34% per year for , bu acceleraed o 0.99% for Afer more han weny years of sluggsh TFP growh, four of he las fve years have seen growh raes near 1%. I could be argued hs represens a new paradgm. Accordng o hs vew, he dffuson of nformaon echnology mproves busness pracces, generaes spllovers, and rases producvy hroughou he economy. If hs rend s susanable, could revve he opmsc expecaons of he 1960s and overcome he pessmsm of The Age of Dmnshed Expecaons, he le of Krugman s (1990) nfluenal book. 7. A closer look a he daa, however, shows ha gans n TFP growh can be raced n subsanal par o nformaon echnology ndusres, whch produce compuers, sem-conducors, and oher hgh-ech gear. The evdence s equally clear ha compuer-usng ndusres lke fnance, nsurance, and real esae (FIRE) and servces have connued o lag n producvy growh. Reconclaon of massve hgh-ech 4. Our work on compuers bulds on he pah-breakng research of Olner and Schel (1994, 2000) and Schel (1997, 1999), and our own earler resuls, repored n Jorgenson and Sroh (1995, 1999, 2000) and Sroh (1998a). Oher valuable work on compuers ncludes Hamowz (1998), Kley (1999), and Whelan (1999). Gordon (1999a) provdes valuable hsorcal perspecve on he sources of U.S. economc growh and Brynjolfsson and Yang (1996) revew he mcro evdence on compuers and producvy. 5. See Baly and Gordon (1988), Sroh (1998a), Jorgenson and Sroh (1999) and Deparmen of Commerce (1999) for earler dscussons of relave prce changes and npu subsuon n he hgh-ech areas. 6. BLS (2000) esmaes for he busness secor show a smlar ncrease from 1.6% for o 2.6% for See CEA (2000, pg. 35) for a comparson of producvy growh a varous pons n he economc expansons of he 1960s, 1980s, and 1990s. 6

7 nvesmen and relavely slow producvy growh n servce ndusres remans an mporan ask for proponens of he new economy poson Wha does hs mply for he fuure? The susanably of growh n labor producvy s he key ssue for fuure growh projecons. For some purposes, he dsncons among capal accumulaon and growh n labor qualy and TFP may no maer, so long as ALP growh can be expeced o connue. I s susanable labor producvy gans, afer all, ha ulmaely drve long-run growh and rase lvng sandards. 9. In hs respec, he recen experence provdes grounds for cauon, snce much depends on producvy gans n hgh-ech ndusres. Ongong echnologcal gans n hese ndusres have been a drec source of mprovemen n TFP growh, as well as an ndrec source of more rapd capal deepenng. Susanably of growh, herefore, hnges crcally on he pace of echnologcal progress n hese ndusres. As measured by relave prce changes, progress has acceleraed recenly, as compuer prces fell 28% per year for compared o 15% n There s no guaranee, of course, of connued producvy gans and prce declnes of hs magnude. Noneheless, as long as hgh-ech ndusres manan he ably o nnovae and mprove her producvy a raes comparable o her long-erm averages, relave prces wll fall and he vruous crcle of an nvesmen-led expanson wll connue Fnally, we argue ha rewards from new echnology accrue o he drec parcpans; frs, o he nnovang ndusres producng hgh-ech asses and, second, o he ndusres ha resrucure o mplemen he laes nformaon echnology. There s no evdence of spllovers from producon of nformaon echnology o he ndusres ha use hs echnology. Indeed, many of he ndusres ha use nformaon echnology mos nensvely, lke FIRE and servces, show hgh raes of subsuon of nformaon echnology for oher npus and relavely low raes of producvy growh. In par, hs may reflec problems n measurng he oupu from hese ndusres, bu he emprcal record provdes lle suppor for he new economy pcure of spllovers cascadng from nformaon echnology producers ono users of hs echnology The paper s organzed as follows. Secon II descrbes our mehodology for quanfyng he sources of U.S. economc growh. We presen resuls for he perod , and focus on he new economy era of he lae 1990s. Secon III explores he mplcaons of he recen experence for fuure growh, comparng our resuls o recen esmaes produced by he Congressonal Budge Offce, he Councl of Economc Advsors, and he Offce of Managemen and Budge. Secon IV moves beyond he aggregae daa and quanfes he producvy growh a he ndusry level. Usng mehodology nroduced by Domar (1961), we consder he mpac of nformaon echnology on aggregae producvy. Secon V concludes. II. The recen US growh experence 12. The US economy has undergone a remarkable ransformaon n recen years wh growh n oupu, labor producvy, and oal facor producvy all accelerang snce he md-1990s. Ths growh 7. See Gullckson and Harper (1999), Jorgenson and Sroh (2000), and Secon IV, below, for ndusry-level analyss. 8. There s no consensus, however, ha echncal progress n compuer and sem-conducor producon s slowng. Accordng o Fsher (2000), chp processng speed connues o ncrease rapdly. Moreover, he produc cycle s accelerang as new processors are brough o marke more quckly. 9. See Dean (1999) and Gullckson and Harper (1999) for he BLS perspecve on measuremen error; Trple and Bosworh (2000) provde an overvew of measurng oupu n he servce ndusres. 7

8 resurgence has led o a wdenng debae abou sources of economc growh and changes n he srucure of he economy. New economy proponens race he changes o developmens n nformaon echnology, especally he rapd commercalzaon of he Inerne, ha are fundamenally changng economc acvy. Old economy advocaes focus on lackluser performance durng he frs half of he 1990s, he ncrease n labor force parcpaon and rapd declne n unemploymen snce 1993, and he recen nvesmen boom. 13. Our objecve s o quanfy he sources of he recen surge n U.S. economc growh, usng new nformaon made avalable by he benchmark revson of he US Naonal Income and Produc Accouns (NIPA) released n Ocober 1999, BEA (1999). We hen consder he mplcaons of our resuls for nermedae-erm projecons of U.S. economc growh. We gve specal aenon o he rapd escalaon n growh raes n he offcal projecons, such as hose by he Congressonal Budge Offce (CBO) and he Councl of Economc Advsers (CEA). The CBO projecons are parcularly suable for our purposes, snce hey are wdely dssemnaed, well documened, and represen bes pracce. We do no focus on he ssue of nflaon and do no commen on poenal mplcaons for moneary polcy. a) Sources of economc growh 14. Our mehodology s based on he producon possbly froner nroduced by Jorgenson (1966) and employed by Jorgenson and Grlches (1967). Ths capures subsuons among oupus of nvesmen and consumpon goods, as well npus of capal and labor. We denfy nformaon echnology (IT) wh nvesmens n compuers, sofware, and communcaons equpmen, as well as consumpon of compuer and sofware as oupus. The servce flows from hese asses are also npus. The aggregae producon funcon employed by Solow (1957, 1960) and, more recenly by Greenwood, Hercowz, and Krusell (1997), s an alernave o our model. In hs approach a sngle oupu s expressed as a funcon of capal and labor npus. Ths mplcly assumes, however, ha nvesmens n nformaon echnology are perfec subsues for oher oupus, so ha relave prces do no change. 15. Our mehodology s essenal n order o capure wo mporan facs abou whch here s general agreemen. The frs s ha prces of compuers have declned drascally relave o he prces of oher nvesmen goods. The second s ha hs rae of declne has recenly acceleraed. In addon, esmaes of nvesmen n sofware, now avalable n he NIPA, are comparable o nvesmen n hardware. The new daa show ha he prce of sofware has fallen relave o he prces of oher nvesmen goods, bu more slowly han prce of hardware. We examne he esmaes of sofware nvesmen n some deal n order o assess he role of sofware n recen economc growh. Fnally, we consder nvesmen n communcaons equpmen, whch shares many of he echnologcal feaures of compuer hardware. ) Producon possbly froner 16. Aggregae oupu Y consss of nvesmen goods I and consumpon goods C. These oupus are produced from aggregae npu X, conssng of capal servces K and labor servces L. We represen producvy as a Hcks-neural augmenaon A of aggregae npu: 10 (1) Y I, C ) = A X ( K, L ). ( 10. I would be a sraghforward change o make echnology labor-augmenng or Harrod-neural, so ha he producon possbly froner could be wren: Y(I, C) = X(K,AL). Also, here s no need o assume ha npus and oupus are separable, bu hs smplfes our noaon. 8

9 The oupus of nvesmen and consumpon goods and he npus of capal and labor servces are hemselves aggregaes, each wh many sub-componens. 17. Under he assumpons of compeve produc and facor markes, and consan reurns o scale, growh accounng gves he share-weghed growh of oupus as he sum of he share-weghed growh of npus and growh n oal facor producvy (TFP): wi, ln I + wc, ln C = vk, ln K + v ln L ln A (2) L, +, where w I, s nvesmen s average share of nomnal oupu, w C, s consumpon s average share of nomnal oupu, v K, s capal s average share of nomnal ncome, v K, s labor s average share of nomnal ncome, w I, + wc, = vk, + vl, = 1, and refers o a frs dfference. Noe ha we reserve he erm oal facor producvy for he augmenaon facor n Equaon (1). 18. Equaon (2) enables us o denfy he conrbuons of oupus as well as npus o economc growh. For example, we can quanfy he conrbuons of dfferen nvesmens, such as compuers, sofware, and communcaons equpmen, o he growh of oupu by decomposng he growh of nvesmen among s sub-componens. Smlarly, we can quanfy he conrbuons of dfferen ypes of consumpon, such as servces from compuers and sofware, by decomposng he growh of consumpon. As shown n Jorgenson and Sroh (1999), boh compuer nvesmen and consumpon of IT have made mporan conrbuons o U.S. economc growh n he 1990s. We also consder he oupu conrbuons of sofware and communcaons equpmen as dsnc hgh-ech asses. Smlarly, we decompose he conrbuon of capal npu o solae he mpac of compuers, sofware, and communcaons equpmen on npu growh. 19. Rearrangng Equaon (2) enables us o presen our resuls n erms of growh n average labor producvy (ALP), defned as y = Y / H, where Y s oupu, defned as an aggregae of consumpon and nvesmen goods, and k = K / H s he rao of capal servces o hours worked H : (3) ( ln L ln H ) + ln A ln y = vk, ln k + vl,. 20. Ths gves he famlar allocaon of ALP growh among hree facors. The frs s capal deepenng, he growh n capal servces per hour. Capal deepenng makes workers more producve by provdng more capal for each hour of work and rases he growh of ALP n proporon o he share of capal. The second erm s he mprovemen n labor qualy, defned as he dfference beween growh raes of labor npu and hours worked. Reflecng he rsng proporon of hours suppled by workers wh hgher margnal producs, labor qualy mprovemen rases ALP growh n proporon o labor s share. The hrd facor s TFP growh, whch ncreases ALP growh on a pon-for-pon bass. ) Compuers, sofware, and communcaons equpmen 21. We now consder he mpac of nvesmen n compuers, sofware, and communcaons equpmen on economc growh. For hs purpose we mus carefully dsngush he use of nformaon echnology and he producon of nformaon echnology. 11 For example, compuers hemselves are an 11. Baly and Gordon (1988), Grlches (1992), Sroh (1998a), Jorgenson and Sroh (1999), Whelan (1999), and Olner and Schel (2000) dscuss he mpac of nvesmen n compuers from hese wo perspecves. 9

10 oupu from one ndusry (he compuer-producng ndusry, Commercal and Indusral Machnery), and compung servces are npus no oher ndusres (compuer-usng ndusres lke Trade, FIRE, and Servces). 22. Massve ncreases n compung power, lke hose experenced by he US economy, herefore reflec wo effecs on growh. Frs, as he producon of compuers mproves and becomes more effcen, more compung power s beng produced from he same npus. Ths rases overall producvy n he compuer-producng ndusry and conrbues o TFP growh for he economy as a whole. Labor producvy also grows a boh he ndusry and aggregae levels Second, he rapd accumulaon of compuers leads o npu growh of compung power n compuer-usng ndusres. Snce labor s workng wh more and beer compuer equpmen, hs nvesmen ncreases labor producvy. If he conrbuons o oupu are capured by he effec of capal deepenng, aggregae TFP growh s unaffeced. As Baly and Gordon (1988) remark, here s no shf n he user frm s producon funcon (pg. 378), and hus no gan n TFP. Increasng deploymen of compuers ncreases TFP only f here are spllovers from he producon of compuers o producon n he compuer-usng ndusres, or f here are measuremen problems assocaed wh he new npus. 24. We conclude ha rapd growh n compung power affecs aggregae oupu hrough boh TFP growh and capal deepenng. Progress n he echnology of compuer producon conrbues o growh n TFP and ALP a he aggregae level. The accumulaon of compung power n compuer-usng ndusres reflecs he subsuon of compuers for oher npus and leads o growh n ALP. In he absence of spllovers hs growh does no conrbue o growh n TFP. 25. The remander of hs secon provdes emprcal esmaes of he varables n Equaons (1) hrough (3). We hen employ Equaons (2) and (3) o quanfy he sources of growh of oupu and ALP for and varous sub-perods. b) Oupu 26. Our oupu daa are based on he mos recen benchmark revson of NIPA. 13 Real oupu Y s measured n chaned 1996 dollars, and P Y, s he correspondng mplc deflaor. Our oupu concep s smlar, bu no dencal, o one used n he Bureau of Labor Sascs (BLS) producvy program. Lke BLS, we exclude he governmen secor, bu unlke BLS we nclude mpuaons for he servce flow from consumers durables and owner-occuped housng. These mpuaons are necessary o preserve comparably beween durables and housng and also enable us o capure he mporan mpac of nformaon echnology on households. 27. Our esmae of curren dollar, prvae oupu n 1998 s $8,013B, ncludng mpuaons of $740B ha prmarly reflec servces of consumers durables. 14 Real oupu growh was 3.63% for he full perod, 12. Trple (1996) pons ou ha much of declne of compuer prces reflecs fallng sem-conducor prces. If all npus are correcly measured for qualy change, herefore, much of he TFP gans n compuer producon are rghly pushed back o TFP gans n sem-conducor producon snce sem-conducors are a major nermedae npu n he producon of compuers. See Flamm (1993) for early esmaes on semconducor prces. We address hs furher n Secon IV. 13. See Appendx A for deals on our source daa and mehodology for oupu esmaes. 14. Curren dollar NIPA GDP n 1998 was $8,759.9B. Our esmae of $8,013B dffers due o oal mpuaons ($740B), excluson of general governmen and governmen enerprse secors ($972B and $128B, respecvely, and excluson of ceran real axes ($376B). 10

11 compared o 3.36% for he offcal GDP seres. Ths dfference reflecs boh our mpuaons and our excluson of he governmen secors n he NIPA daa. Appendx Table A-1 presens he curren dollar value and correspondng prce ndex of oal oupu and he IT asses nvesmen n compuers I c, nvesmen n sofware I s, nvesmen n communcaons equpmen I m, consumpon of compuers and sofware C c, and he mpued servce flow from consumers compuers and sofware, D c. 28. The mos srkng feaure of hese daa s he enormous prce declne for compuer nvesmen, 18% per year from 1960 o 1995 (Char 1). Snce 1995 hs declne has acceleraed o 27.6% per year. By conras he relave prce of sofware has been fla for much of he perod and only began o fall n he lae 1980s. The prce of communcaons equpmen behaves smlarly o he sofware prce, whle consumpon of compuers and sofware shows declnes smlar o compuer nvesmen. The op panel of Table 1 summarzes he growh raes of prces and quanes for major oupu caegores for and for In erms of curren dollar oupu, nvesmen n sofware s he larges IT asse, followed by nvesmen n compuers and communcaons equpmen (Char 2). Whle busness nvesmens n compuers, sofware, and communcaons equpmen are by far he larges caegores, households have spen more han $20B per year on compuers and sofware snce 1995, generang a servce flow of comparable magnude. c) Capal sock and capal servces 30. Ths secon descrbes our capal esmaes for he US economy from 1959 o We begn wh nvesmen daa from he Bureau of Economc Analyss, esmae capal socks usng he perpeual nvenory mehod, and aggregae capal socks usng renal prces as weghs. Ths approach, orgnaed by Jorgenson and Grlches (1967), s based on he denfcaon of renal prces wh margnal producs of dfferen ypes of capal. Our esmaes of hese prces ncorporae dfferences n asse prces, servce lves and deprecaon raes, and he ax reamen of capal ncomes We refer o he dfference beween growh n capal servces and capal sock as he growh n capal qualy q K, ; hs represens subsuon owards asses wh hgher margnal producs. 17 For example, he shf oward IT ncreases he qualy of capal, snce compuers, sofware, and communcaons equpmen have relavely hgh margnal producs. Capal sock esmaes, lke hose orgnally employed by Solow (1957), fal o accoun for hs ncrease n qualy. 32. We employ a broad defnon of capal, ncludng angble asses such as equpmen and srucures, as well as consumers durables, land, and nvenores. We esmae a servce flow from he nsalled sock of consumers durables, whch eners our measures of boh oupu and npu. I s essenal o nclude hs servce flow, snce a seadly rsng proporon s assocaed wh nvesmens n IT by he household secor. In order o capure he mpac of nformaon echnology on U.S. economc growh, 15. See Appendx B for deals on heory, source daa, and mehodology for capal esmaes. 16. Jorgenson (1996) provdes a recen dscusson of our model of capal as a facor of producon. BLS (1983) descrbes he verson of hs model employed n he offcal producvy sascs. Hulen (2000) provdes a revew of he specfc feaures of hs mehodology for measurng capal npu and he lnk o economc heory. 17. More precsely, growh n capal qualy s defned as he dfference beween he growh n capal servces and he growh n he average of he curren and lagged sock. Appendx B provdes deals. We use a geomerc deprecaon rae for all reproducble asses, so ha our esmaes are no dencal o he wealh esmaes publshed by BEA (1998b). 11

12 nvesmens by busness and household secors as well as he servces of he resulng capal socks mus be ncluded. 33. Our esmae of capal sock s $26T n 1997, subsanally larger han he $17.3T n fxed prvae capal esmaed by BEA (1998b). Ths dfference reflecs our ncluson of consumer s durables, nvenores, and land. Our esmaes of capal sock for comparable caegores of asses are que smlar o hose of BEA. Our esmae of fxed prvae capal n 1997, for example, s $16.8T, almos he same as ha of BEA. Smlarly, our esmae of he sock of consumers' durables s $2.9T, whle BEA's esmae s $2.5T. The remanng dscrepances reflec our ncluson of land and nvenores. Appendx Table B-1 ls he componen asses and 1998 nvesmen and sock values; Table B-2 presens he value of capal sock from 1959 o 1998, as well as prce ndces for oal capal and IT asses. 34. The socks of IT busness asses (compuers, sofware, and communcaons nvesmen equpmen), as well as consumers purchases of compuers and sofware, have grown dramacally n recen years, bu reman relavely small. In 1998, combned IT asses accouned for only 3.4% of angble capal, and 4.6% of reproducble, prvae asses. 35. We now move o esmaes of capal servces flows, where capal socks of ndvdual asses are aggregaed usng renal prces as weghs. Appendx Table B-3 presens he curren dollar servce flows and correspondng prce ndexes for , and he second panel of Table 1 summarzes he growh raes for prces and quanes of npus for and There s a clear acceleraon of growh of aggregae capal servces from 2.8% per year for o 4.8% for Ths s largely due o rapd growh n servces from IT equpmen and sofware, and reverses he rend oward slower capal growh hrough Whle nformaon echnology asses are only 11.2% of he oal, he servce shares of hese asses are much greaer han he correspondng asse shares. In 1998 capal servces are only 12.4% of capal socks for angble asses as a whole, bu servces are 40.0% of socks for nformaon echnology. Ths reflecs he rapd prce declnes and hgh deprecaon raes ha ener no he renal prces for nformaon echnology. 37. Char 3 hghlghs he rapd ncrease n he mporance of IT asses, reflecng he accelerang pace of relave prce declnes. In he 1990s, he servce prce for compuer hardware fell 14.2% per year, compared o an ncrease of 2.2% for non-nformaon echnology capal. As a drec consequence of hs relave prce change, compuer servces grew 24.1%, compared o only 3.6% for he servces of non-it capal n he 1990s. The curren dollar share of servces from compuer hardware reached nearly 3.5% of all capal servces n The rapd accumulaon of sofware, however, appears o have dfferen orgns. The prce of sofware nvesmen has declned much more slowly, -1.7% per year for sofware versus -19.5% for compuer hardware for 1990 o These dfferences n nvesmen prces lead o a much slower declne n servce prces for sofware and compuers, -1.6% versus -14.2%. Noneheless, frms have been accumulang sofware que rapdly, wh real capal servces growng 13.3% per year n he 1990s. Whle lower han he 24.1% growh n compuers, sofware growh s much more rapd han growh n oher forms of angble capal. Complemenary beween sofware and compuers s one possble explanaon. 18. Tevln and Whelan (1999) provde emprcal suppor for hs explanaon, reporng ha compuer nvesmen s parcularly sensve o he cos of capal, so ha he rapd drop n servce prces can be expeced o lead o large nvesmen response. 12

13 Frms respond o he declne n relave compuer prces by accumulang compuers and nvesng n complemenary npus lke sofware o pu he compuers no operaon A compeng explanaon s ha he offcal prce ndexes used o deflae sofware nvesmen om a large par of rue qualy mprovemens. Ths would lead o a subsanal oversaemen of prce nflaon and a correspondng undersaemen of real nvesmen, capal servces, and economc growh. Accordng o Moulon, Parker, and Seskn (1999) and Parker and Grmm (2000), only prces for prepackaged sofware are calculaed from consan-qualy prce deflaors based on hedonc mehods. Prces for busness own-accoun sofware are based on npu-cos ndexes, whch mplcly assume no change n he producvy of compuer programmers. Cusom sofware prces are a weghed average of prepackaged sofware and own-accoun sofware, wh an arbrary 75% wegh for busness own-accoun sofware prces. Thus, he prce deflaors for nearly wo-hrds of sofware nvesmen are esmaed under he mananed assumpon of no gan n producvy. 20 If he qualy of own-accoun and cusom sofware s mprovng a a pace even remoely close o packaged sofware, hs mples a large undersaemen n nvesmen n sofware. 40. Alhough he prce declne for communcaons equpmen durng he 1990s s comparable o ha of sofware, as offcally measured n he NIPA, nvesmen has grown a a rae ha s more n lne wh prces. However, here are also possble measuremen bases n he prcng of communcaons equpmen. The echnology of swchng equpmen, for example, s smlar o ha of compuers; nvesmen n hs caegory s deflaed by a consan-qualy prce ndex developed by BEA. Convenonal prce deflaors are employed for ransmsson gear, such as fber-opc cables, whch also appear o be declnng rapdly n prce. Ths could lead o an underesmae of he rae of growh n communcaons equpmen nvesmen, capal sock, and capal servces, as well as an overesmae of he rae of nflaon. 21 We reurn o hs ssue a he end of Secon II. d) Measurng labor servces 41. Ths secon descrbes our esmaes of labor npu for he US economy from 1959 o We begn wh ndvdual daa from he Census of Populaon for 1970, 1980, and 1990, as well as he annual Curren Populaon Surveys. We esmae consan qualy ndexes for labor npu and s prce o accoun for heerogeney of he workforce across sex, employmen class, age, and educaon levels. Ths follows he approach of Jorgenson, Gollop and Fraumen (1987), whose esmaes have been revsed and updaed by Ho and Jorgenson (1999) The dsncon beween labor npu and labor hours s analogous o he dsncon beween capal servces and capal sock. Growh n labor npu reflecs he ncrease n labor hours, as well as changes n he composon of hours worked as frms subsue among heerogeneous ypes of labor. We defne he growh n labor qualy as he dfference beween he growh n labor npu and hours worked. 19. An economerc model of he responsveness of dfferen ypes of capal servces o own- and cross-prce effecs could be used o es for complemenary, bu hs s beyond he scope of he paper. 20. Accordng o Parker and Grmm (2000), oal sofware nvesmen of $123.4B ncludes $35.7B n prepackaged sofware, $42.3B n cusom sofware, and $45.4B n own-accoun sofware n Applyng he weghng convenons employed by BEA, hs mples $46.3B=$35.7B+0.25*$42.3B, or 38% of he oal sofware nvesmen, s deflaed wh explc qualy adjusmens. 21. Grmm (1997) presens hedonc esmaes for dgal elephone swches and repors average prce declnes of more han 10% per year from 1985 o Appendx C provdes deals on he source daa and mehodology. 13

14 Labor qualy reflecs he subsuon of workers wh hgh margnal producs for hose wh low margnal producs, whle he growh n hours employed by Solow (1957) and ohers does no capure hs subsuon. Appendx Table C-1 presens our esmaes of labor npu, hours worked, and labor qualy. 43. Our esmaes show he value of labor expendures o be $4,546B n 1998, roughly 57% of he value of oupu. Ths value share accuraely reflecs he NIPA measure of oupu and our mpuaons for capal servces. If we exclude hese mpuaons, labor s share rses o 62%, n lne wh convenonal esmaes. As shown n Table 1, he growh of he ndex of labor npu L approprae for our model of producon n Equaon (1) acceleraed o 2.8% for , from 2.0% for Ths s prmarly due o he growh of hours worked, whch rose from 1.4% for o 2.4% for , as labor force parcpaon ncreased and unemploymen raes plummeed The growh of labor qualy deceleraed n he lae 1990s, from 0.65% for o 0.43% for Ths slowdown capures well-known underlyng demographc rends n he composon of he work force, as well as exhauson of he pool of avalable workers as unemploymen raes have seadly declned. Projecons of fuure economc growh ha om labor qualy, lke hose of CBO, mplcly ncorporae changes n labor qualy no measured TFP growh. Ths reduces he relably of projecons of fuure economc growh. Forunaely, hs s easly remeded by exrapolang demographc changes n he work force n order o reflec foreseeable changes n composon by characerscs of workers such as age, sex, and educaonal aanmen. e) Quanfyng he sources of growh 45. Table 2 presens resuls of our growh accounng decomposon based on Equaon (2) for he perod 1959 o 1998 and varous sub-perods, as well as prelmnary esmaes hrough As n Jorgenson and Sroh (1999), we decompose economc growh by boh oupu and npu caegores n order o quanfy he conrbuon of nformaon echnology (IT) o nvesmen and consumpon oupus, as well as capal and consumers durable npus. We exend our prevous reamen of he oupus and npus of compuers by denfyng sofware and communcaons equpmen as dsnc IT asses. 46. To quanfy he sources of IT-relaed growh more explcly, we employ he exended producon possbly froner: (4) Y ( Y, C, I, I, I, D ) = A X ( K, K, K, K, D, D, L) n c c s m c where oupus nclude compuer and sofware consumpon C c, compuer nvesmen I c, sofware nvesmen I s, elecommuncaons nvesmen I m, he servces of consumers compuers and sofware D c, and oher oupus Y n, Inpus nclude he capal servces of compuers K c, sofware K s, elecommuncaons equpmen K m, and oher capal asses K n, servces of consumers compuers and sofware D c and oher durables D n, and labor npu L. 24 As n Equaon (1), oal facor producvy s denoed by A and represens he ably o produce more oupu from he same npus. Tme subscrps have been dropped for convenence. 47. The correspondng exended growh accounng equaon s: 23. By comparson, BLS (2000) repors growh n busness hours of 1.2% for and 2.3% for The slgh dscrepances reflec our mehods for esmang hours worked by he self-employed, as well as mnor dfferences n he scope of our oupu measure 24. Noe we have broken broadly defned capal no angble capal servces, K, and consumers durable servces, D. n c s m n c 14

15 (5) w lny + w lnc + w lni + w lni + w lni Yn v Kn n Cc lnk + v n Kc c lnk Ic c + v Ks c Is lnk + v s s Km Im lnk + v m m Dn + w lnd = Dc lnd + v n Dc c lnd + v lnl+ lna c L where w and v denoe average shares n nomnal ncome for he subscrped varable wyn + wcc + wic + wis+ wim+ wdc = v Kn + vkc + vks+ vkm+ vdn + vdc + vl = 1, and we refer o a share-weghed growh rae as he conrbuon of an npu or oupu. ) Oupu growh 48. We frs consder he sources of oupu growh for he enre perod 1959 o Capal servces make he larges growh conrbuon of 1.8 percenage pon (1.3 percenage pons from busness capal and 0.5 from consumers durable asses), labor servces conrbue 1.2 percenage pons, and TFP growh s responsble for only 0.6 percenage pons. Inpu growh s he source of nearly 80 percen of U.S. growh over he pas 40 years, whle TFP has accouned for approxmaely one-ffh. Char 4 hghlghs hs resul by showng he relavely small growh conrbuon of he TFP resdual n each sub-perod. 49. More han hree-quarers of he conrbuon of broadly defned capal reflecs he accumulaon of capal sock, whle ncreased labor hours accoun for slghly less han hree-quarers of labor s conrbuon. The qualy of boh capal and labor have made mporan conrbuons, 0.45 percenage pons and 0.32 percenage pons per year, respecvely. Accounng for subsuon among heerogeneous capal and labor npus s herefore an mporan par of quanfyng he sources of economc growh. 50. A look a he US economy before and afer 1973 reveals some famlar feaures of he hsorcal record. Afer srong oupu and TFP growh n he 1960s and early 1970s, he US economy slowed markedly hrough 1990, wh oupu growh fallng from 4.3% o 3.1% and TFP growh fallng almos wo-hrds of a percenage pon from 1.0% o 0.3%. Growh n capal npus also slowed, fallng from 5.0% for o 3.8% for , whch conrbued o sluggsh ALP growh, 2.9% for o 1.4% for We now focus on he perod and hghlgh recen changes. 25 Relave o he early 1990s, oupu growh has ncreased by nearly wo percenage pons. The conrbuon of capal jumped by 1.0 percenage pon, he conrbuon of labor rose by 0.4 percenage pons, and TFP growh acceleraed by 0.6 percenage pon. ALP growh rose 1.0 percenage pon. The rsng conrbuons of capal and labor encompass several well-known rends n he lae 1990s. Growh n hours worked acceleraed as labor markes ghened, unemploymen fell o a 30-year low, and labor force parcpaon raes ncreased. 26 The conrbuon of capal reflecs he nvesmen boom of he lae 1990s as busnesses poured resources no plan and equpmen, especally compuers, sofware, and communcaons equpmen. 52. The acceleraon n TFP growh s perhaps he mos remarkable feaure of he daa. Afer averagng only 0.34% per year from 1973 o 1995, he acceleraon of TFP o 0.99% suggess massve 25. Table 2 also presens prelmnary resuls for he more recen perod , where he 1999 numbers are based on he esmaon procedure descrbed n Appendx E, raher han he dealed model descrbed above. The resuls for and are que smlar; we focus our dscusson on he perod See Kaz and Krueger (1999) for explanaons for he srong performance of he US labor marke, ncludng demographc shfs oward a more maure labor force, a rse n he prson age populaon, mproved effcency n labor markes, and he weak backbone hypohess of worker resran. 15

16 mprovemens n echnology and ncreases n he effcency of producon. Whle he resurgence n TFP growh n he 1990s has ye o surpass perods of he 1960s and early 1970s, more rapd TFP growh s crcal for susaned growh a hgher raes. 53. Chars 5 and 6 hghlgh he rsng conrbuons of nformaon echnology (IT) oupus o U.S. economc growh. Char 5 shows he breakdown beween IT and non-it oupus for varous sub-perods from 1959 o 1998, whle Char 6 decomposes he conrbuon of IT oupus no s componens. Alhough he role of IT has seadly ncreased, Char 5 shows ha he recen nvesmen and consumpon surge nearly doubled he oupu conrbuon of IT for relave o Char 6 shows ha compuer nvesmen s he larges sngle IT conrbuor n he lae 1990s, and ha consumpon of compuers and sofware s becomng ncreasngly mporan as a source of oupu growh. 54. Chars 7 and 8 presen a smlar decomposon of he role of IT as an npu no producon, where he conrbuon s rsng even more dramacally. Char 7 shows ha he capal and consumers durable conrbuon from IT ncreased rapdly n he lae 1990s, and now accouns for more wo-ffhs of he oal growh conrbuon from broadly defned capal. Char 8 shows ha compuer hardware s also he sngle larges IT conrbuor on he npu sde, whch reflecs he growng share and rapd growh raes of he lae 1990s. 55. The conrbuon of compuers, sofware, and communcaons equpmen presens a dfferen pcure from Jorgenson and Sroh (1999) for boh daa and mehodologcal reasons. Frs, he BEA benchmark revson has classfed sofware as an nvesmen good. Whle sofware s growng more slowly han compuers, he subsanal nomnal share of sofware servces has rased he conrbuon of nformaon echnology. Second, we have added communcaons equpmen, also a slower growng componen of capal servces, wh smlar effecs. Thrd, we now ncorporae asse-specfc revaluaon erms n all renal prce esmaes. Snce he acquson prces of compuers are seadly fallng, asse-specfc revaluaon erms have rased he esmaed servce prce and ncreased he share of compuer servces. Fnally, we have modfed our mng convenon and now assume ha capal servces from ndvdual asses are proporonal o he average of he curren and lagged sock. For asses wh relavely shor servce lves lke IT, hs s a more reasonable assumpon han n our earler work, whch assumed ha ook a full year for new nvesmen o become producve Ths large ncrease n he growh conrbuon of compuers and sofware s conssen wh recen esmaes by Olner and Schel (2000), alhough her esmae of conrbuon s somewha larger. They repor ha compuer hardware and sofware conrbued 0.93 percenage pons o growh for , whle communcaons conrbued anoher The dscrepancy prmarly reflecs our broader oupu concep, whch lowers he npu share of hese hgh-ech asses, and also mnor dfferences n ax parameers and sock esmaes. Whelan (1999) also repors a larger growh conrbuon of 0.82 percenage pons from compuer hardware for The dscrepancy also reflecs our broader oupu concep. In addon, Whelan (1999) nroduces a new mehodology o accoun for reremen and suppor coss ha generaes a consderably larger capal sock and rases he npu share and he growh conrbuon from compuer capal. 57. Despe dfferences n mehodology and daa sources among sudes, a consensus s buldng ha compuers are havng a subsanal mpac on economc growh. 28 Wha s drvng he ncrease n he conrbuons of compuers, sofware, and communcaons equpmen? As we argued n Jorgenson and 27. We are ndebed o Dan Schel for very helpful dscussons of hs mng convenon. 28. Olner and Schel (2000) provde a dealed comparson of he resuls across several sudes of compuers and economc growh. 16

17 Sroh (1999), prce changes lead o subsuon oward capal servces wh lower relave prces. Frms and consumers are respondng o relave prce changes. 58. Table 1 shows he acquson prce of compuer nvesmen fell nearly 28% per year, he prce of sofware fell 2.2%, and he prce of communcaons equpmen fell 1.7% durng he perod , whle oher oupu prces rose 2.0%. In response o hese prce changes, frms accumulaed compuers, sofware, and communcaons equpmen more rapdly han oher forms of capal. Invesmen oher han nformaon echnology acually declned as a proporon of prvae domesc produc. The sory of household subsuon oward compuers and sofware s smlar. These subsuons sugges ha gans of he compuer revoluon accrue o frms and households ha are adep a resrucurng acves o respond o hese relave prce changes. ) Average labor producvy growh 59. To provde a dfferen perspecve on he sources of economc growh we can focus on ALP growh. By smple arhmec, oupu growh equals he sum of hours growh and growh n labor producvy. 29 Table 3 shows he oupu breakdown beween growh n hours and ALP for he same perods as n Table 2. For he perod , ALP growh was he predomnan deermnan of oupu growh, ncreasng jus over 2% per year for , whle hours ncreased abou 1.6% per year. We hen examne he changng mporance of he facors deermnng ALP growh. As shown n Equaon (3), ALP growh depends on a capal deepenng effec, a labor qualy effec, and a TFP effec. 60. Char 9 shows he mporance of each facor, revealng he well-known producvy slowdown of he 1970s and 1980s, and hghlghng he acceleraon of labor producvy growh n he lae 1990s. The slowdown hrough 1990 reflecs less capal deepenng, declnng labor qualy growh, and decelerang growh n TFP. The growh of ALP slpped furher durng he early 1990s wh he serous slump n capal deepenng only parly offse by a revval n he growh of labor qualy and an up-ck n TFP growh. Slow growh n hours combned wh slow ALP growh durng o produce a furher slde n he growh of oupu. Ths sands ou from prevous cyclcal recoveres durng he poswar perod, when oupu growh acceleraed durng he recovery, powered by more rapd hours and ALP growh. 61. For he mos recen perod of , srong oupu growh reflecs growh n labor hours and ALP almos equally. Comparng o , oupu growh acceleraed by nearly 2 percenage pons due o a 1 percenage pon ncrease n hours worked, and a 1.0 percenage pon ncrease n ALP growh. 30 Char 9 shows he acceleraon n ALP growh s due o capal deepenng from he nvesmen boom, as well as faser TFP growh. Capal deepenng conrbued 0.49 percenage pons o he acceleraon n ALP growh, whle acceleraon n TFP growh added 0.63 percenage pons. Growh n labor qualy slowed somewha as growh n hours acceleraed. Ths reflecs he fallng unemploymen rae and ghenng of labor markes as more workers wh relavely low margnal producs were drawn no he workforce. Olner and Schel (2000) also show a declne n he growh conrbuon of labor qualy n he lae 1990s, from 0.44 for o 0.31 for Our decomposon also hrows some lgh on he hypohess advanced by Gordon (1999b), who argues he vas majory of recen ALP gans are due o he producon of IT, parcularly compuers, raher han he use of IT. As we have already poned ou, more effcen IT-producon generaes aggregae TFP growh as more compung power s produced from he same npus, whle IT-use affecs ALP growh va 29. See Krugman (1997) and Blnder (1997) for a dscusson of he usefulness of hs relaonshp. 30. BLS (2000) shows smlar rends for he busness secor wh hours growh ncreasng from 1.2% for o 2.3% for , whle ALP ncreased from 1.58% o 2.63%. 17

18 capal deepenng. In recen years, acceleraon of TFP growh s a slghly more mporan facor n he acceleraon of ALP growh han capal deepenng. Effcency gans n compuer producon are mporan par of aggregae TFP growh, as Gordon s resuls on ALP sugges. We reurn o hs ssue n Secon III. ) Toal facor producvy growh 63. Fnally, we consder he remarkable performance of U.S. TFP growh n recen years. Afer mananng an average rae of 0.33% for he perod , TFP growh rose o 0.36% for and hen vauled o 0.99% per year for Ths jump s a major source of growh n oupu and ALP for he US economy (Chars 4 and 9). Whle TFP growh for he 1990s has ye o aan he peaks of some perods n he golden age of he 1960s and early 1970s, he recen acceleraon suggess ha he US economy may be recuperang form he anemc producvy growh of he pas wo decades. Of course, cauon s warraned unl more hsorcal experence s avalable. 64. As early as Domar (1961), economss have ulzed a mul-ndusry model of he economy o race aggregae producvy growh o s sources a he level of ndvdual ndusres. Jorgenson, Gollop, and Fraumen (1987) and Jorgenson (1990) have employed hs model o denfy he ndusry-level sources of growh. More recenly, Gullckson and Harper (1999) and Jorgenson and Sroh (2000) have used he model for smlar purposes. We pospone more dealed consderaon of he sources of TFP growh unl we have examned he mplcaons of he recen growh resurgence for nermedae-erm projecons. f) Alernave growh accounng esmaes 65. Tables 1 hrough 3 and Chars 1 hrough 9 repor our prmary resuls usng he offcal daa publshed n he NIPA. As we have already noed, however, here s reason o beleve ha he raes of nflaon n offcal prce ndces for ceran hgh-ech asses, noably sofware and elecommuncaons equpmen, may be oversaed. Moulon, Parker, and Seskn (1999) and Parker and Grmm (2000), for example, repor ha only he pre-packaged poron of sofware nvesmen s deflaed wh a consan-qualy deflaor. Own-accoun sofware s deflaed wh an npu cos ndex and cusom sofware s deflaed wh a weghed average of he prepackaged and own-accoun deflaor. Smlarly, BEA repors ha n he communcaons equpmen caegory, only elephone swchng equpmen s deflaed wh a consan-qualy, hedonc deflaor. 66. Ths subsecon ncorporaes alernave prce seres for sofware and communcaons equpmen and examnes he mpac on he esmaes of U.S. economc growh and s sources. Table 4 presens growh accounng resuls under hree dfferen scenaros. The Base Case repeas he esmaes from Table 2, whch are based on offcal NIPA prce daa. Two addonal cases, Moderae Prce Declne and Rapd Prce Declne, ncorporae prce seres for sofware and communcaons equpmen ha show faser prce declnes and correspondngly more rapd real nvesmen growh The Moderae Prce Declne case assumes ha prepackaged sofware prces are approprae for all ypes of prvae sofware nvesmen, ncludng cusom and busness own-accoun sofware. Snce he ndex for prepackaged sofware s based on explc qualy adjusmens, falls much faser han he prces 31. The noon ha offcal prce deflaors for nvesmen goods om subsanal qualy mprovemens s hardly novel. The magseral work of Gordon (1990) successfully quanfed he oversaemens of raes of nflaon for he prces of a wde array of nvesmen goods, coverng all producers durable equpmen n he NIPA. 18

19 of cusom and own-accoun sofware, -10.1% vs. 0.4% and 4.1% respecvely, for he full perod accordng o Parker and Grmm (2000). For communcaons equpmen, he daa are more lmed and we assume prces fell 10.7% per year hroughou he enre perod. Ths esmae s he average annual smoohed declne for dgal swchng equpmen for repored by Grmm (1997). Whle hs seres may no be approprae for all ypes of communcaons equpmen, explos he bes avalable nformaon. 68. The Rapd Prce Declne case assumes ha sofware prces fell 16% per year for , he rae of qualy-adjused prce declne repored by Brynjolfsson and Kemerer (1996) for mcrocompuer spreadshees for Ths s a slghly faser declne han he 15% for esmaed by Gandal (1994), and consderably faser han he 3% annual declne for word processors, spreadshees, and daabases for repored by Olner and Schel (1994). For communcaons equpmen, we used esmaes from he mos recen perod from Grmm (1997), who repors a declne of 17.9% per year for Whle hs exercse necessarly nvolves some arbrary choces, he esmaes ncorporae he lmed daa now avalable and provde a valuable perspecve on he crucal mporance of accounng for qualy change n he prces of nvesmen goods. Comparsons among he hree cases are useful n suggesng he range of uncerany currenly confronng analyss of U.S. economc growh. 70. Before dscussng he emprcal resuls, s worhwhle o emphasze ha more rapd prce declne for nformaon echnology has wo drec effecs on he sources of growh, and one ndrec effec. The alernave nvesmen deflaors rase real oupu growh by reallocang nomnal growh away from prces and owards quanes. Ths also ncreases he growh rae of capal sock, snce here are larger nvesmen quanes n each year. More rapd prce declnes also gve greaer wegh o capal servces from nformaon echnology. 71. The couner-balancng effecs of ncreased oupu and ncreased npu growh lead o an ndrec effec on measured TFP growh. Dependng on he relave shares of hgh-ech asses n nvesmen and capal servces, he TFP resdual wll ncrease f he oupu effec domnaes or decrease f he effec on capal servces domnaes. 32 Followng Solow (1957, 1960), Greenwood, Hercowz, and Krusell (1997) om he oupu effec and arbue he npu effec o nvesmen-specfc (emboded) echncal change. Ths mus be carefully dsngushed from he effecs of ndusry-level producvy growh on TFP growh, dscussed n Secon IV. 72. Table 4 repors growh accounng resuls from hese hree scenaros Base Case, Moderae Prce Declne, and Rapd Prce Declne. The resuls are no surprsng he more rapd he prce declne for sofware and communcaons, he faser he rae of growh of oupu and capal servces. Relave o he Base Case, oupu growh ncreases by 0.16 percenage pons per year for n he Moderae Prce Declne case and by 0.34 percenage pons n he Rapd Prce Declne case. Capal npu growh shows slghly larger ncreases across he hree cases. Clearly, consan-qualy prce ndexes for nformaon echnology are essenal for furher progress n undersandng he growh mpac of hgh-ech nvesmen. 73. The acceleraon n oupu and npu growh reflecs he ncreased conrbuons from IT, as well as he effec on he TFP resdual. In parcular, he oupu conrbuon from sofware for ncreases from 0.21 percenage pons n he Base Case o 0.29 percenage pons under Moderae Prce Declne o 0.40 percenage pons wh Rapd Prce Declne. Smlarly, he capal servces conrbuon for sofware ncrease from 0.19 o 0.29 o 0.45 percenage pons. The conrbuon of communcaons equpmen 32. Ths pon was orgnally made by Jorgenson (1966); Hulen (2000) provdes a recen revew. 19

20 shows smlar changes. Resdual TFP growh falls slghly durng he 1990s, as he npu effec ouweghs he oupu effec, due o he large capal servces shares of IT. 74. Ths exercse llusraes he sensvy of he sources of growh o alernave prce ndexes for nformaon echnology. We do no propose o argue he wo alernave cases are more nearly correc han he Base Case wh he offcal prces from NIPA. Gven he paucy of qualy-adjused prce daa on hgh-ech equpmen, we smply do no know. Raher, we have red o hghlgh he mporance of correcly measurng prces and quanes o undersand he dynamc forces drvng U.S. economc growh. As hgh-ech asses connue o prolferae hrough he economy and oher nvesmen goods become ncreasngly dependen on elecronc componens, hese measuremen ssues wll become ncreasngly mporan. Whle he ask ha les ahead of us wll be onerous, he creaon of qualy-adjused prce ndexes for all hgh-ech asses deserves op prory. g) Decomposon of TFP esmaes. 75. We nex consder he role of hgh-ech ndusres as a source of connued TFP growh. As dscussed above, ncreased oupu of hgh-ech nvesmen goods has made mporan conrbuons o aggregae growh. 33 CEA (2000) allocaes annual TFP growh of 0.39 percenage pons o he compuer producon, whle Olner and Schel (2000) allocae 0.47 percenage pons o he producon of compuers and compuer-relaed sem-conducor producon for he perod We employ a mehodology based on he prce dual approach o measuremen of producvy a he ndusry level. Ancpang our complee ndusry analyss Secon IV, below, s worhwhle o spell ou he decomposon of TFP growh by ndusry. Usng he Domar approach o aggregaon, ndusry-level producvy growh s weghed by he rao of he gross oupu of each ndusry o aggregae value-added o esmae he ndusry conrbuon o aggregae TFP growh. In he dual approach, he rae of producvy growh s measured as he declne n he prce of oupu, plus a weghed average of he growh raes of npu prces. 77. In he case of compuer producon, hs expresson s domnaed by wo erms; namely, he prce of compuers and he prce of sem-conducors, a prmary nermedae npus no he compuer-producng ndusry. If sem-conducor ndusry oupu s used only o produce compuers, hen s conrbuon o compuer ndusry producvy growh, weghed by compuer ndusry oupu, precsely cancels s ndependen conrbuon o aggregae TFP growh. 34 Ths ndependen conrbuon from he sem-conducor ndusry, based on he complee Domar weghng scheme, s he value of sem-conducor oupu dvded by aggregae value added, mulpled by he rae of prce declne n sem-conducors. 78. We repor deals of our TFP decomposon for and n Table 5 and summarze he IT vs. non-it comparson n Char 10. In our Base Case, usng offcal NIPA daa, we esmae he producon of nformaon echnology accouns for 0.44 percenage pons for , compared o 0.25 percenage pons for Ths reflecs he accelerang relave prce changes prces due o radcal shorenng of he produc cycle for sem-conducors CEA (2000), Gordon (1999a), Jorgenson and Sroh (1999), Olner and Schel (2000), Sroh (1998), and Whelan (1999) have provded esmaes. 34. Ths calculaon shows ha he smplfed model of Olner and Schel (2000) s a specal case of he complee Domar weghng scheme used n Secon IV. 35. Relave prce changes n he Base Case are aken from he nvesmen prces n Table 5. Oupu shares are esmaed based on fnal demand sales avalable from he BEA webse for compuers and from Parker and 20

21 79. As we have already suggesed, he esmaes of prce declnes for hgh-ech nvesmens n our Base Case calculaons may be conservave; n fac, hese esmaes may be very conservave. Consder he Moderae Prce Declne Case, whch reflecs only par of he daa we would requre for consan-qualy esmaes of he nformaon echnology prce declnes. Ths booss he conrbuon of nformaon echnology o TFP growh o 0.64 percenage pons, an ncrease of 0.20 percenage pons for Proceedng o wha may appear o be he ouer lm of plausbly, bu sll conssen wh he avalable evdence, we can consder he case of Rapd Prce Declne. The conrbuon of nformaon echnology o TFP growh s now a robus 0.86 percenage pons, accounng for all of TFP growh for III. Seng he speed lm 80. We nex consder he susanably of recen U.S. growh rends over longer me horzons. Rapd oupu growh s hghly desrable, of course, bu canno connue ndefnely f fueled by a fallng unemploymen rae and hgher labor force parcpaon. Oupu growh drven by connung TFP mprovemens, on he oher hand, s more lkely o perss. The susanably of growh has clear mplcaons for governmen polces. Snce economc growh affecs ax revenues, poenal governmen expendures, and he long-erm vably of programs lke Socal Secury and Medcare, s closely suded by governmen agences. Ths secon examnes he mpac of he recen success of he US economy on offcal growh forecass. a) A bref revew of forecas mehodologes 81. The mporance of economc growh for he US governmen s evden n he consderable effor expended on projecng fuure growh. No fewer han fve governmen agences he Congressonal Budge Offce (CBO), he Socal Secury Admnsraon (SSA), he Offce of Managemen and Budge (OMB), he Councl of Economc Advsors (CEA), and he General Accounng Offce (GAO) repor esmaes of fuure growh for nernal use or publc dscusson. Ths secon brefly dscusses he mehodologes used by hese agences All fve agences employ models ha res securely on neoclasscal foundaons. Whle he deals and assumpons vary, all employ an aggregae producon model smlar o Equaon (1), eher explcly or mplcly. In addon, hey all ncorporae demographc projecons from he SSA as he basc buldng block for labor supply esmaes. CBO (1995, 1997, 1999a, 1999b, 2000) and GAO (1995, 1996) employ an aggregae producon funcon and descrbe he role of labor growh, capal accumulaon, and echncal progress explcly. SSA (1992, 1996), OMB (1997, 2000), and CEA (2000) on he oher hand, employ a smplfed relaonshp where oupu growh equals he sum of growh n hours worked and labor producvy. Projecons over longer me horzons are drven by aggregae supply wh relavely lle aenon o busness cycle flucuaons and aggregae demand effecs. 83. Gven he common framework and source daa, s no surprsng ha he projecons are que smlar. Reporng on esmaes released n 1997, Sroh (1998b) fnds ha SSA and GAO projecons of per capa GDP n 2025 were vrually dencal, whle CBO was abou 9% hgher due o economc feedback effecs from he mprovng governmen budge suaon. More recenly, CBO (2000) projecs Grmm (2000) for sofware. Invesmen n communcaons equpmen s from he NIPA, and we esmae oher fnal demand componens for communcaons equpmen usng raos relave o fnal demand for compuers. Ths s an approxmaon necessaed by he lack of complee daa of sales o fnal demand by dealed commody. 36. Sroh (1998b) provdes deals and references o supporng documens. 21

22 real GDP growh of 2.8% and OMB (2000) projecs 2.7% for , whle CEA (2000) repors 2.8% for Alhough he mng s slghly dfferen CBO projecs faser growh han OMB earler n he perod and CEA repors projecons only hrough 2007 he esmaes are vrually dencal. All hree projecons denfy he recen nvesmen boom as a conrbuor o rsng labor producvy and capal deepenng as a source of connung economc growh. We now consder he CBO projecons n greaer deal. b) CBO s growh projecons 84. Of he fve governmen agences CBO ulzes a sophscaed and dealed long-run growh model of he US economy. 37 The core of hs model s a wo-facor producon funcon for he non-farm busness secor wh CBO projecons based on labor force growh, naonal savngs and nvesmen, and exogenous TFP growh. Producon funcon parameers are calbraed o hsorcal daa, usng a Cobb-Douglas model: (6) Y = A H 0.7 K 0.3 where Y s poenal oupu, H s poenal hours worked, K s capal npu, and A s poenal oal facor producvy CBO projecs hours worked on he bass of demographc rends wh separae esmaes for dfferen age and sex classfcaons. These esmaes ncorporae SSA esmaes of populaon growh, as well as nernal CBO projecons of labor force parcpaon and hours worked for he dfferen caegores. However, CBO does use hs demographc deal o denfy changes n labor qualy. Capal npu s measured as he servce flow from four ypes of capal socks producers durable equpmen excludng compuers, compuers, nonresdenal srucures, and nvenores. Socks are esmaed by he perpeual nvenory mehod and weghed by renal prces, hereby ncorporang some changes n capal qualy. TFP growh s projeced on he bass of recen hsorcal rends, wh labor qualy growh mplcly ncluded n CBO s esmae of TFP growh. 86. Turnng o he mos recen CBO projecons, repored n CBO (2000), we focus on he non-farm busness secor, whch drves he GDP projecons and s based on he mos dealed growh model. Table 6 summarzes CBO s growh rae esmaes for he 1980s and 1990s, and projecons for We also presen esmaes from BLS (2000) and our resuls CBO projecs poenal GDP growh of 3.1% for , up slghly from 3.0% n he 1980s and 2.9% n he 1990s. CBO expecs acual GDP growh o be somewha slower a 2.8%, as he economy moves o a susanable, long-run growh rae. Acceleraon n poenal GDP growh reflecs faser capal accumulaon and TFP growh, parly offse by slower growh n hours worked. Projeced GDP growh s 37. The fve secors nonfarm busness, farm, governmen, resdenal housng, and households and nonprof nsuons follow he breakdown n Table 1.7 of he NIPA. 38. See CBO (1995, 1997) for deals on he underlyng model and he adjusmens for busness cycle effecs ha lead o he poenal seres. 39. Noe he growh raes n Table 5 do no exacly mach Table 2 due o dfferences n calculang growh raes. All growh raes n Table 5 follow CBO s convenon of calculang dscree growh raes as g = g 1/ [( X / X 0 ) 1 ]* 100 [ ln( X / X 0 )/ ] * 100 =., whle growh raes n Table 2 are calculaed as 22

23 0.4% hgher han earler esmaes (CBO (1999b)) due o an upward revson n capal growh (0.1%), slghly more rapd growh n hours (0.1%), and faser TFP growh, reflecng he benchmark revsons of NIPA and oher echncal changes (0.2%) CBO s esmaes for he non-farm busness secor show srong poenal oupu growh of 3.5% for Whle projeced oupu growh s n lne wh experence of he 1990s and somewha faser han he 1980s, here are sgnfcan dfferences n he underlyng sources. Mos mporan, CBO projecs an ncreasng role for capal accumulaon and TFP growh over he nex decade, whle hours growh slows. Ths mples ha fuure oupu growh s drven by ALP growh, raher han growh n hours worked. 89. CBO projecs poenal non-farm busness ALP growh for o rse o 2.3%, powered by capal deepenng (3.2%) and TFP growh (1.4%). Ths represens a marked jump n ALP growh, relave o 1.5% n he 1980s and 1.9% n he 1990s. In consderng wheher he recen acceleraon n ALP growh represens a rend break, CBO gves consderable wegh o he possbly ha he experence of he pas few years represens such a break (CBO (2000), pg. 43). Ths assumpon appears plausble gven recen evens, and low unemploymen and hgh labor force parcpaon make growh n hours worked a less lkely source of fuure growh. Fallng nvesmen prces for nformaon echnology make capal deepenng economcally aracve, whle he recen acceleraon n TFP growh gves furher grounds for opmsc projecons. 90. As he nvesmen boom connues and frms subsue oward more nformaon echnology n producon, CBO has seadly revsed s projeced growh raes of capal upward. I s worhwhle nong jus how much he role of capal accumulaon has grown n successve CBO projecons, rsng from a projeced growh rae of 3.6% n January 1999 (CBO (1999a)) o 4.1% n July 1999 (CBO (1999b)) o 4.4% n January 2000 (CBO (2000)). Ths reflecs he ncluson of relavely fas-growng sofware nvesmen n he benchmark revson of NIPA, bu also exrapolaes recen nvesmen paerns. 91. Smlarly, CBO has rased s projeced rae of TFP growh n successve esmaes from 1.0% n January 1999 o 1.1% n July 1999 o 1.4% n January These upward revsons reflec mehodologcal changes n how CBO accouns for he rapd prce declnes n nvesmen, parcularly compuers, whch added 0.2%. In addon, CBO adjusmens for he benchmark revson of NIPA conrbued anoher 0.1%. 92. Table 6 also repors our own esmaes of growh for roughly comparable perods. Whle he me perods are no precsely dencal, our resuls are smlar o CBO s. We esmae slghly faser growh durng he 1980s, due o rapdly growng CD servces, bu slghly lower raes of capal accumulaon due o our broader measure of capal. Our growh of hours worked s hgher, snce we om he cyclcal adjusmens made by CBO o develop her poenal seres. 42 Fnally, our TFP growh raes are consderably lower, due o our labor qualy adjusmens and ncluson of consumers durables. If we were o drop he labor qualy adjusmen, our esmae would rse o 1.0% per year from 1990 o 1998, compared o 1.2% for CBO for The remanng dfference reflecs he fac ha we do no nclude he rapd TFP growh of 1999, bu do nclude he servces of consumers durables, whch nvolve no growh n TFP. 40. See CBO (2000, pg. 25 and pg. 43) for deals. 41. Earler upward revsons o TFP growh prmarly reflec echncal adjusmen for mehodologcal changes o varous prce ndexes and ncreased TFP projecons (CBO (1999b), pg. 3). 42. See CBO (1995) for deals on he mehodology for cyclcal adjusmens o derve he poenal seres. 23

24 c) Evaluang CBO s projecons 93. Evaluang CBO s growh projecons requres an assessmen of her esmaes of he growh of capal, labor, and TFP. I s mporan o emphasze ha hs s no nended as a crcsm of CBO, bu raher a descrpon of bes pracce n he dffcul area of growh projecons. We also pon ou comparsons beween our esmaes and CBO s esmaes are no exac due o our broader oupu concep and our focus on acual seres, as opposed he poenal seres ha are he focus of CBO. 94. We begn wh CBO s projecons of poenal labor npu. These daa, based on he hours worked from BLS and SSA demographc projecons, show a declne n hours growh from 1.5% n he 1990s o 1.2% for he perod Ths slowdown reflecs famlar demographc changes assocaed wh he agng of he US populaon. However, CBO does no explcly esmae labor qualy, so ha labor composon changes are ncluded n CBO s esmaes of TFP growh and essenally held consan. 95. We esmae growh n labor qualy of 0.57% per year for , whle our projecons based on demographc rends yeld a growh rae of only 0.32% for he perod. Assumng CBO s labor share of 0.70, hs mples ha a declne n he growh conrbuon from labor qualy of abou 0.18 percenage pons per year over CBO s projecon horzon. Snce hs labor qualy effec s mplcly ncorporaed no CBO s TFP esmaes, we conclude her TFP projecons are oversaed by hs 0.18 percenage pons declne n he labor qualy conrbuon. 96. TFP growh s perhaps he mos problemacal ssue n long-erm projecons. Based on he recen experence of he US economy, appears reasonable o expec srong fuure producvy performance. As dscussed above and shown n Table 2, TFP growh has ncreased markedly durng he perod However, exrapolaon of hs experence runs he rsk of assumng ha a emporary producvy spur s a permanen change n rend. 97. Second, he recen acceleraon of TFP growh s due n consderable par o he surge n producvy growh n ndusres producng IT. Ths makes he economy parcularly vulnerable o slowng producvy growh n hese ndusres. Compuer prces have declned a exraordnary raes n recen years and s far from obvous ha hs can connue. However, acceleraon n he rae of declne reflecs he change n he produc cycle for sem-conducors, whch has shfed from hree years o wo and may be permanen. 98. We conclude ha CBO s projecon of TFP growh s opmsc n assumng a connuaon of recen producvy rends. However, we reduce hs projecon by only 0.18 percen per year o reflec he declne n labor qualy growh, resulng n projeced TFP growh of 1.22% per year. To oban a projecon of labor npu growh we add labor qualy growh of 0.32% per year o CBO s projecon of growh n hours of 1.2% per year. Mulplyng labor npu growh of 1.52% per year by he CBO labor share of 0.7, we oban a conrbuon of labor npu of 1.06%. 99. CBO s projeced annual growh of capal npu of 4.4% s hgher han n any oher decade, and 0.8% hgher han n he 1990s. Ths projecon exrapolaes recen ncreases n he relave mporance of compuers, sofware, and communcaons equpmen. Connung rapd capal accumulaon s also predcaed on he perssence of hgh raes of declne n asse prces, resulng from rapd producvy growh n he IT producng secors. Any aenuaon n hs rae of declne would produce a double whammy less TFP growh and reduced capal deepenng Relave o hsorcal rends, CBO s capal npu growh projecon of 4.4% seems ou of lne wh he projeced growh of poenal oupu of 3.5%. Durng he 1980s capal growh exceeded oupu growh by 0.4%, accordng o her esmaes, or 0.1% by our esmaes. In he 1990s capal growh 24

25 exceeded oupu growh by only 0.2%, agan accordng o her esmaes, and 0.1% by our esmaes. Ths dfference jumps o 0.9% for he perod of CBO s projecons, Revsng he growh of capal npu downward o reflec he dfference beween he growh of oupu and he growh of capal npu durng he perod of 0.2% would reduce he CBO s projeced oupu growh o 3.34% per year. Ths s he sum of he projeced growh of TFP of 1.22% per year, he conrbuon of labor npu of 1.06% per year, and he conrbuon of capal npu of 1.06% per year. Ths s a very modes reducon n oupu growh from CBO s projecon of 3.5% per year and can be arbued o he omsson of a projeced declne n labor qualy growh We conclude ha CBO s projecons are conssen wh he evdence hey presen, as well as our own analyss of recen rends. We mus emphasze, however, ha any slowdown n echncal progress n nformaon echnology could have a major mpac on poenal growh. Workng hrough boh oupu and npu channels, he US economy has become hghly dependen on nformaon echnology as he drvng force n connued growh. Should producvy growh n hese ndusres faler, he projecons we have revewed could be overly opmsc. IV. Indusry producvy 103. We have explored he sources of U.S. economc growh a he aggregae level and demonsraed ha acceleraed TFP growh s an mporan conrbuor o he recen growh resurgence. Aggregae TFP gans he ably o produce more oupu from he same npus reflecs he evoluon of he producon srucure a he plan or frm level n response o echnologcal changes, manageral choces, and economc shocks. These frm- and ndusry-level changes hen cumulae o deermne aggregae TFP growh. We now urn our aenon o ndusry daa o race aggregae TFP growh o s sources n he producvy growh of ndvdual ndusres, as well as reallocaons of oupu and npus among ndusres Our approach ulzes he framework of Jorgenson, Gollop, and Fraumen (1987) for quanfyng he sources of economc growh for U.S. ndusres. The ndusry defnons and daa sources have been brough up-o-dae. The mehodology of Jorgenson, Gollop, and Fraumen for aggregang over ndusres s based on Domar s (1961) approach o aggregaon. Jorgenson and Sroh (2000) have presened summary daa from our work; oher recen sudes of ndusry-level producvy growh nclude BLS (1999), Corrado and Slfman (1999), and Gullckson and Harper (1999). The remander of hs secon summarzes our mehodology and dscusses he resuls. a) Mehodology 105. As wh he aggregae producon model dscussed n Secon II, we begn wh an ndusry-level producon model for each ndusry. A crucal dsncon, however, s ha ndusry oupu Q I s measured usng a gross oupu concep, whch ncludes oupu sold o fnal demand as well as oupu sold o oher ndusres as nermedae goods. Smlarly, npus nclude all producon npus, ncludng capal servces K I and labor servces L I, as well as nermedae npus, energy E I and maerals M I, purchased from oher ndusres. 43 Our model s based on he ndusry producon funcon: (7) Q = A X K, L, E, M ) ( 43. Ths s analogous o he secoral oupu concep used by BLS. See Gullckson and Harper (1999), parcularly pp for a revew of he conceps and ermnology used by he BLS. 25

26 where me subscrps have been suppressed for clary We can derve a growh accounng equaon smlar o Equaon (2) for each ndusry o measure he sources of economc growh for ndvdual ndusres. The key dfference s he use of gross oupu and an explc accounng of he growh conrbuon of nermedae npus purchased from oher ndusres. Ths yelds: (8) ln Q = wk ln K + wl ln L + we ln E + wm ln M + ln A where w s he average share of he subscrped npu n he h ndusry and he assumpons of consan reurns o scale and compeve markes mply w w + w + w = 1. + K L E M 107. The augmenaon facor lna I represens he growh n oupu no explaned by npu growh and s concepually analogous o he TFP concep used above n he aggregae accouns. I represens effcency gans, echnologcal progress, scale economes, and measuremen errors ha allow more measured gross oupu o be produced from he same se of measured npus. We refer o hs erm as ndusry producvy or smply producvy o dsngush from TFP, whch s esmaed from a value-added concep of oupu Domar (1961) frs developed an nernally conssen mehodology ha lnked ndusry-level producvy growh n Equaon (8) wh aggregae TFP growh n Equaon (2). He showed ha aggregae TFP growh can be expressed as a weghed average of ndusry producvy growh: (9) ln A = 37 w ln A, w = P, Q, = PY, Y P, + P 1 Y, 1 Q Y, 1 1 where w s he Domar wegh, P Q s curren dollar gross oupu n secor, and P Y Y s curren dollar aggregae value-added. Ths smplfed verson of he aggregaon formula gven by Jorgenson, Gollop, and Fraumen (1987), excludes re-allocaons of value added, capal npu, and labor npu by secor. Jorgenson and Sroh (2000) show ha hese erms are neglgble for he perod , whch s conssen wh he resuls of Jorgenson, Gollop, and Fraumen (1987) and Jorgenson (1990) for perods of smlar duraon Domar weghs have he noable feaure ha hey do no sum o uny. Ths reflecs he dfferen oupu conceps used a he aggregae and ndusry levels n Equaons (1) and (7), respecvely. A he aggregae level, only prmary npus are ncluded, whle boh prmary and nermedae npus are ncluded n he ndusry producon funcons. For he ypcal ndusry, gross oupu consderably exceeds value added, so he sum of gross oupu across ndusres exceeds he sum of value added. Ths weghng mehodology mples ha economy-wde TFP growh can grow faser han producvy n any ndusry, snce producvy gans are magnfed as hey work her way hrough he producon process In addon o provdng an nernally conssen aggregaon framework, ndusry-level gross oupu allows an explc role for nermedae goods as a source of ndusry growh. For example, Trple 44. BLS refers o hs concep as mul-facor producvy (MFP). 45. Jorgenson, Gollop, and Fraumen (1987), parcularly Chaper 2, provde deals and earler references; Gullckson and Harper (1999, pg. 50) dscuss how aggregae producvy can exceed ndusry producvy n he Domar weghng scheme. 26

27 (1996) shows ha a subsanal poron of he prce declnes n compuer oupu can be raced o seep prce declnes n sem-conducors, he major nermedae npu n he compuer-producng ndusry. Prce declnes n sem-conducors reflec echnologcal progress Moore s law n acon. Ths should be measured as producvy growh n he ndusry ha produces sem-conducors. By correcly accounng for he quany and qualy of nermedae npus, he gross oupu concep allows aggregae TFP gans o be correcly allocaed among ndusres. b) Daa sources 111. Our prmary daa nclude a se of ner-ndusry ransacons accouns developed by he Employmen Projecons offce a he BLS. These daa cover a relavely shor me perod from 1977 o We lnked he BLS esmaes o ndusry-level esmaes back o 1958, descrbed by Sroh (1998a), and exrapolaed o 1996 usng curren BLS and BEA ndusry daa. 46 Ths generaed a me seres for 1958 o 1996 for 37 ndusres, a roughly he wo-dg Sandard Indusral Classfcaon (SIC) level, ncludng Prvae Households and General Governmen. 47 Table 7 lss he 37 ndusres, he relave sze n erms of 1996 value-added and gross oupu, and he underlyng SIC codes for each ndusry Before proceedng o he emprcal resuls, we should pon ou wo lmaons of hs ndusry-level analyss. Due o he long lag n obanng dealed ner-ndusry ransacons, nvesmen, and oupu daa by ndusry, our ndusry daa are no conssen wh he BEA benchmark revson of NIPA publshed n December 1999; hey correspond o he NIPA produced by BEA n November As a consequence, hey are no drecly comparable o he aggregae daa descrbed n Tables 1 hrough 6. Snce he mpac of he benchmark revson was o rase oupu and aggregae TFP growh, s no surprsng ha he ndusry daa show slower oupu and producvy growh. Second, our esmaes of renal prces for all asses n hs ndusry analyss are based on he ndusry-wde asse revaluaon erms, as n Sroh (1998a). They are no drecly comparable o he aggregae daa on capal npu, where asse-specfc revaluaon erms are ncluded n he renal prce esmaes. The use of ndusry-wde revaluaon erms ends o reduce he growh n capal servces snce asses wh fallng relave prces, such as compuers, have large servce prces and rapd accumulaon raes. c) Emprcal resuls ) Sources of ndusry growh 113. Table 8 repors esmaes of he componens of Equaon (8) for he perod For each ndusry, we show he growh n oupu, he conrbuon of each npu (defned as he nomnal share-weghed growh rae of he npu), and producvy growh. We also repor average labor producvy (ALP) growh, defned as real gross oupu per hour worked, and he Domar weghs calculaed from Equaon (9). We focus he dscusson of our resuls on ndusry producvy and ALP growh Indusry producvy growh was he hghes n wo hgh-ech ndusres, Indusral Machnery and Equpmen, and Elecronc and Elecrc Equpmen, a 1.5% and 2.0% per year, respecvely. Indusral Machnery ncludes he producon of compuer equpmen (SIC #357) and Elecronc Equpmen ncludes he producon of sem-conducors (SIC #3674) and communcaons equpmen (SIC #366). The enormous 46. We are graeful o Mun Ho for hs exensve conrbuons o he consrucon of he ndusry daa. 47. Appendx D provdes deals on he componen daa sources and lnkng procedures. 27

28 echnologcal progress n he producon of hese hgh-ech capal goods has generaed fallng prces and producvy growh, and fueled he subsuon owards nformaon echnology An mporan feaure of hese daa s ha we can solae producvy growh for ndusres ha produce nermedae goods, for example, Elecronc and Elecrc Equpmen. 48 Consder he conras beween compuer producon and sem-conducor producon. Compuers are par of fnal demand, sold as consumpon and nvesmen goods, and can be denfed n he aggregae daa, as we dd n Table 2. Sem-conducors, on he oher hand, do no appear a he aggregae level, snce hey are sold almos enrely as an npu o compuers, elecommuncaons equpmen, and an ncreasngly broad range of oher producs such as machne ools, auomobles, and vrually all recen vnages of applances. Noneheless, mproved sem-conducor producon s an mporan source of aggregae TFP growh snce s ulmaely responsble for he lower prces and mproved qualy of goods lke compuers produced for fnal demand The enormous prce declnes n compuer equpmen and he promnen role of nvesmen n compuers n he GDP accouns have led Gordon (1999b), Whelan (1999), and ohers o emphasze echnologcal progress n he producon of compuers. Trple (1996), however, quanfes he role of sem-conducors as an nermedae npu and esmaes ha fallng sem-conducor prces may accoun for vrually all of he relave prce declnes n compuer equpmen. He concludes, producvy n he compuer ndusry palls besde he enormous ncreases n producvy n he sem-conducor ndusry (Trple (1996), pg. 137) The declne n prces of sem-conducors s refleced n he prces of nermedae npu no he compuer ndusry, effecvely movng producvy away from compuers and oward sem-conducor producon. Buldng on hs observaon, Olner and Schel (2000) presen a model ha ncludes hree secors sem-conducor producon, compuer producon, and oher goods and shows ha sem-conducors producvy s subsanally more mporan han compuer producvy. Our complee ndusry framework wh Domar aggregaon over all ndusres capures he conrbuons of producvy growh from all ndusres The mpac of nermedae npus can be seen n Table 8 n he large conrbuon of maeral npus n he Indusral Machnery ndusry. Snce a subsanal poron of hese npus consss of sem-conducors purchased from he Elecronc Equpmen ndusry, producvy gans ha lower he prce of sem-conducors ncrease he flow of nermedae npus no he Indusral Machnery ndusry. By correcly accounng for hese npus, ndusry producvy growh n he Indusral Machnery ndusry falls, and we can rghly allocae echnologcal progress o he Elecronc Equpmen ndusry, whch produces sem-conducors. Whle hs ype of ndusry reallocaon does no affec aggregae producvy growh, s mporan o denfy he sources of producvy growh and allocae hs among ndusres n order o assess he susanably of he recen acceleraon The wo hgh-ech ndusres also show hgh raes of average labor producvy (ALP) growh of 3.1% and 4.1% per year. Ths reflecs an underlyng relaonshp smlar o Equaon (3) for he aggregae daa, where ndusry ALP growh reflecs ndusry producvy growh, labor qualy growh, and ncreases n npu nensy, ncludng ncreases n capal as well as nermedae npus per hour worked. As mpled 48. Our ndusry classfcaon s oo broad o solae he role of sem-conducors. 49. Ths concluson ress crcally on he npu share of sem-conducors n he compuer ndusry. Trple repors Census daa esmaes of hs share a 15% for , bu saes ndusry sources esmae hs share o be closer o 45%. Ths has an mporan mpac on hs resuls. A one end of he specrum, f no accoun s made for sem-conducor prce declnes, he relave producvy n compuer equpmen ncreases 9.1% for Assumng a 15% share for sem-conducors causes hs o fall o 9%; assumng a 45% share causes a fall o 1%. 28

29 by Table 8, hese ndusres showed rapd accumulaon of capal and nermedae npus, whch rased ALP growh above producvy growh. I s also worhwhle o noe ha Communcaons, anoher hgh-ech ndusry, shows ALP growh much faser han ndusry producvy growh due o he rapd accumulaon of npus, noably nermedae maerals. These resuls hghlgh he crucal mporance of accounng for all npus when examnng he sources of ndusry growh Producvy growh n nformaon echnology provdes a fnal perspecve on he conclusons of Greenwood, Hercowz, and Krusell (1997) and Hercowz (1998). They argue ha some 60% of poswar U.S. growh can be arbued o nvesmen-specfc (emboded) producvy growh, whch hey dsngush from npu accumulaon and (dsemboded) producvy growh. As evdence, hey noe he relave prce of equpmen n he Uned Saes has fallen 3% per year, whch hey nerpre as evdence of echncal change ha affec capal goods, bu no consumpon goods. Our decomposon, however, reveals ha declnes n he prces of nvesmen goods are he consequence of mprovemens n ndusry (dsemboded) producvy. Domar aggregaon shows how hese mprovemens conrbue drecly o aggregae TFP growh. There s no separae role for nvesmen-specfc echncal change Oher ndusres ha show relavely srong producvy growh nclude Agrculure, Texle Mll Producs, Rubber and Plasc, Insrumens, Trade. All of hese ndusres experenced producvy growh n he 1.0% per year range, and ALP growh n he 2-3% range. Indusres wh he slowes producvy growh nclude Peroleum and Gas, Consrucon, Prnng and Publshng, and Governmen Enerprses, all of whch showed a declnes n producvy of nearly 0.5% per year I s worh emphaszng ha nne ndusres showed negave producvy growh for he enre perod, a couner-nuve resul, f we were o nerpre producvy growh solely as echnologcal progress. I s dffcul o envson echnology seadly worsenng for a perod of nearly 40 years as mpled by hese esmaes. The perplexng phenomenon of negave echncal progress was a prmary movaon for he work of Corrado and Slfman (1999) and Gullckson and Harper (1999), who sugges perssen measuremen problems as a plausble explanaon. Corrado and Slfman (1999) conclude, a more lkely sascal explanaon for he mplausble producvy, profably, and prce rends s ha hey reflec problems n measurng prces (pg. 331). If prces are sysemacally oversaed because qualy change s no accuraely measured, hen oupu and producvy are correspondngly undersaed. We do no pursue hs dea here, bu smply pon ou ha measuremen problems are consdered a reasonable explanaon by some sascal agences An alernave nerpreaon for negave producvy growh s he possbly of declnes n effcency ha have no assocaon wh echnology. These mgh nclude lower qualy of managemen and worsenng of ndusral organzaon hrough he growh of barrers o enry. Ths appears o be plausble explanaon, gven he wdespread occurrence of negave producvy growh for exended perods of me. Unl more careful research lnkng frm- and plan-level producvy o ndusry producvy esmaes has been done, would be premaure o leap o he concluson ha esmaes of economc performance should be adjused so as o elmnae negave producvy growh raes, wherever hey occur Low producvy growh raes are surprsng n lgh of he fac ha many of he affeced ndusres are heavy nvesors n nformaon echnology. Sroh (1998a), for example, repors nearly 80% of compuer nvesmen n he early 1990s was n hree servce-relaed ndusres, Trade, FIRE, and Servces. Trple (1999) repors a hgh concenraon n servce ndusres usng he BEA s capal use survey. The apparen combnaon of slow producvy growh and heavy compuer-use remans an 50. Dean (1999) summarzes he BLS vew on hs ssue. McGuckn and Sroh (2000) aemp o quanfy he magnude of he poenal msmeasuremen effecs. 29

30 mporan obsacle for new economy proponens who argue ha he use of nformaon echnology s fundamenally changng busness pracces and rasng producvy hroughou he US economy. ) Comparson o oher resuls 125. Before proceedng o he Domar aggregaon resuls, s useful o compare hese resuls o hree oher recen sudes BLS (1999), Corrado and Slfman (1999) and Gullckson and Harper (1999). BLS (1999) repors ndusry producvy growh ( ndusry mulfacor producvy n her ermnology) for 19 manufacurng ndusry for Corrado and Slfman (1999) repor esmaes of ALP growh for seleced one- and wo-dg SIC ndusres for he perod Gullckson and Harper (1999) repor ndusry producvy growh for ceran one and wo-dg SIC ndusres based on wo oupu seres for he perod Smlar o BLS (1999), Gullckson and Harper use a secoral oupu concep esmaed by he Employmen Projecons saff a BLS and also, for , use BEA s gross oupu seres, adjused for conssency. 51 Noe ha none of hese sudes reflec he BEA benchmark revson of NIPA Tme perod, ndusry classfcaon, and mehodologcal dfferences make a defnve reconclaon o our resuls mpossble. For example, BLS (1999) repors dealed manufacurng ndusres; Corrado and Slfman (1999) use a value-added concep, BEA s gross produc orgnang, for oupu; Gullckson and Harper (1999) use he same daa sources as we do, bu make dfferen adjusmens for conssency and do no accoun for labor qualy growh. Noneheless, s useful o compare broad rends over smlar me perods o assess he robusness of our fndngs We frs consder he ALP esmaes from Corrado and Slfman (1999). We can compare smlar me perods, bu here are relavely few overlappng ndusres snce our ndusry breakdown focuses on manufacurng ndusres, whle hey provde deals prmarly for servce ndusres. For comparable ndusres, however, he resuls are que smlar. For seven ndusres wh comparable defnons, fve show dfferences n ALP growh of less han 0.25% when we compare our esmaes for o Corrado and Slfman s esmaes for (Corrado and Slfman (1999, Table 2). 52 Our ALP growh raes for Communcaon and Trade are below hers by 1.3% and 0.4%, respecvely, for hese perods Our producvy esmaes for for he majory of ndusres are smlar o hose of Gullckson and Harper (1999). The range of dscrepances s somewha greaer due o he dffculy of lnkng he varous daa ses needed o esmae nermedae npus and ndusry producvy growh. For 7 of he 11 comparable ndusres producvy dfferences are below 0.5%, whle we found larger dscrepances for Meal Mnng, Coal Mnng, Peroleum and Gas, and Servces. 53 Smlar dfferences can also be seen n Gullckson and Harper s comparson of producvy growh esmaed from he BLS and BEA gross oupu seres, where hey fnd dfferences of 0.5 percenage pons or more n 17 ou of 40 ndusres and aggregaes. Mehodologcal dfferences, such as he ncluson of labor qualy growh n our esmaes of labor npu growh, conrbue o hs dvergence, as do dfferen mehods for lnkng daa ses Neher Corrado and Slfman (1999) nor Gullckson and Harper (1999) break ou ALP growh or ndusry producvy growh for dealed manufacurng ndusres. To gauge hese resuls, we have compared our manufacurng resuls o he manufacurng ndusry esmaes n BLS (1999). For he See Gullckson and Harper (1999), parcularly pp , for deals 52. These fve ndusres are Agrculure, Consrucon, Transporaon, FIRE and Servces. Noe ha our esmaes for are no gven n Table These seven oher ndusres ha are comparable are Agrculure, Nonmeallc Mnng, Consrucon, Transporaon, Communcaons, Trade, and FIRE. 30

31 ndusres ha are comparable, en showed producvy dfferences of less han 0.25% for ; wo showed dfferences beween 0.25% and 0.5%; and he remanng sx ndusres, Texle Mlls, Lumber and Wood, Peroleum Refnng, Leaher, Sone, Clay and Glass, and Insrumens, showed dfferences greaer han ) Domar aggregaon 130. We now urn o he aggregaon of ndusry producvy growh descrbed by Equaon (9). Ths s no drecly comparable o our esmaes of aggregae producvy, due o dfferen vnages of daa and a broader defnon of oupu. Noneheless, s useful o quanfy an ndusry s conrbuon o aggregae TFP growh and o race aggregae producvy growh back o s sources a he level of he ndvdual ndusry. These resuls updae he earler esmaes of Jorgenson, Gollop, and Fraumen (1987). Gordon (1999b) presens a smlar decomposon for ALP growh, alhough he focuses exclusvely on he conrbuon from compuer producon We presen our esmaes of each ndusry s conrbuon o aggregae TFP growh for he perod n Char 11. Ths follows Equaon (9) by weghng ndusry producvy growh by he Domar wegh, defned as ndusry gross oupu dvded by aggregae value-added. Summng across ndusres gves an esmae of aggregae TFP growh of 0.48 for Ths s lower han he number mpled by Table 2 for wo reasons. Frs, he daa are pror o he BEA benchmark revson, whch rased oupu and TFP growh. Second, hese esmaes nclude a broader oupu concep ha ncludes Governmen Enerprses, whch we esmae has negave ndusry producvy growh, and he General Governmen, whch has zero producvy growh by defnon. The esmae s conssen, however, wh he esmaes n Ho, Jorgenson, and Sroh (1999) and Jorgenson and Sroh (1999), whch are based on he same vnage of daa The mos srkng feaure of Char 11 s he wde range of ndusry conrbuons. Trade, Indusral Machnery, and Elecronc Equpmen make he larges conrbuon, alhough for dfferen reasons. Trade has sold, bu no exceponally srong producvy growh of almos 1% per year, bu makes he larges conrbuon due o s large relave sze; Trade receves a Domar wegh of nearly Indusral Machnery and Elecronc Equpmen, on he oher hand, make mporan conrbuons due o her rapd producvy growh, 1.5% and 2.0%, respecvely, n spe of her relave small szes wh Domar weghs of 0.05 and 0.04, respecvely. An ndusry's conrbuon o aggregae producvy growh depends on boh producvy performance and relave sze Char 11 also hghlghs he mpac of he nne ndusres ha experenced negave producvy growh over hs perod. Agan, boh performance and relave sze maer. Servces makes a negave conrbuon of 0.07 due o s large wegh and producvy growh of 0.19%. Consrucon, on he oher hand, shows even slower ndusry producvy growh, 0.44% per year, bu makes a smaller negave conrbuon, snce s so much smaller han Servces. We can also do a hough expermen smlar o Corrado and Slfman (1999) and Gullckson and Harper (1999) and magne ha producvy growh s zero n hese nne ndusres raher han negave. By zerong ou he negave conrbuons, we fnd 54. The 10 ndusres wh small dfferences are Food Producs, Apparel, Furnure and Fxures, Paper Producs, Prnng and Publshng, Chemcal Producs, Prmary Meals, Indusral and Commercal Machnery, Elecronc and Elecrc Machnery, and Mscellaneous Manufacurng. The wo ndusres wh slghly larger dfferences are Rubber and Plasc, and Fabrcaed Meals. 31

32 aggregae TFP growh would have been 0.22% hgher, an ncrease of nearly half. 55 Clearly, negave producvy growh n hese ndusres s an mporan par of he aggregae producvy sory Fnally, hese daa enable us o provde some new perspecve on an argumen made by Gordon (1999b), who decomposes rend-adjused ALP growh no a poron due o compuer-producon and a resdual poron for he res of he economy. 56 He fnds he former accouns for vrually all of he producvy acceleraon snce Whle we canno commen drecly on hs emprcal esmaes snce our ndusry daa end n 1996 and we examne TFP growh raher han ALP growh, we can pon o an mporan qualfcaon o hs argumen. The US economy s made up of ndusres wh boh posve and negave producvy growh raes, so ha comparng one ndusry o he aggregae of all ohers necessarly nvolves aggregaon over off-seng producvy rends. The fac ha hs aggregae does no show ne producvy growh does no enal he absence of gans n producvy n any of he componen ndusres, snce hese gans could be offse by declnes n oher ndusres Consder our resuls for and he mporance of he negave conrbuons. The fve ndusres wh he larges, posve conrbuons Trade, Elecronc Equpmen, Agrculure, Indusral Machnery, and Transpor cumulavely accoun for he sum across all ndusres, abou 0.5% per year. Noneheless, we fnd szable producvy growh n some remanng ndusres ha are offse by negave conrbuons n ohers. Ths logc and he prevalence of negave producvy growh raes a he ndusry level, n BLS (1999), Corrado and Slfman (1999), and Gullckson and Harper (1999), sugges ha a smlar argumen could hold for ALP and for he mos recen perod. Ths rases he queson of wheher off-seng producvy growh raes are responsble for Gordon s fndng ha here s no producvy growh n he 99 percen of he economy locaed ousde he secor whch manufacures compuer hardware (Gordon (1999b, pg 1, alcs n orgnal)). Assessng he breadh of recen producvy gans and denfyng he sources n producvy growh a he ndusry level remans an mporan queson for fuure research. V. Conclusons 136. The performance of he US economy n he lae 1990s has been nohng shor of phenomenal. Afer a quarer cenury of economc malase, accelerang oal facor producvy growh and capal deepenng have led o a remarkable growh resurgence. The pessmsm of he famous Solow (1987) paradox, ha we see compuers everywhere bu n he producvy sascs, has gven way o opmsm of he nformaon age. The producvy sascs, begnnng n 1995, have begun o reveal a clearly dscernble mpac of nformaon echnology. Boh labor producvy and TFP growh have jumped o raes no seen for such an exended perod of me snce he 1960s. Whle a subsanal poron of hese gans can be arbued o compuers, here s growng evdence of smlar conrbuons from sofware and communcaons equpmen each equal n mporance o compuers The forces shapng he nformaon economy orgnae n he rapd progress of sem-conducor echnology Moore s Law a work. These gans are drvng down relave prces of compuers, sofware, and communcaons equpmen and nducng massve nvesmens n hese asses by frms and households. Technologcal progress and he nduced capal deepenng are he prmary facors behnd accelerang 55. Ths aggregae mpac s smaller han ha esmaed by Gullckson and Harper (1999), parly because our shares dffer due o he ncluson of a Household and Governmen ndusry. Also, as poned ou by Gullckson and Harper, a complee re-esmaon would accoun for he change n nermedae npus mpled by he producvy adjusmens. 56. Olner and Schel (2000) argue ha Gordon s concluson s weakened by he new NIPA daa released n he benchmark revson, whch allow a larger role for ALP growh ousde of compuer producon. 32

33 oupu growh n recen years. The susanably of recen growh rends herefore hnges o a grea degree on prospecs for connung progress, especally n he producon of sem-conducors. Whle hs seems plausble and perhaps even lkely, he conrbuon of hgh-ech asses o he growh resurgence remans subjec o consderable uncerany, owng o ncomplee nformaon on prce rends for hese asses The srong performance of he US economy has no gone unnoced. Forecasers have had o rase her projeced growh raes and rase hem agan. The moderae speed lms se by Blnder (1997) and Krugman (1997), reflecng he bes evdence avalable only a few years ago, have gven way o he opmsm of he ordnarly conservave communy of offcal forecasers. Our revew of he evdence now avalable suggess ha he offcal forecasers are relyng very heavly on a connuaon of he acceleraon n U.S. economc growh snce Wha are he rsks o he opmsc vew of fuure U.S. economc growh n he nformaon age? Upward revson of growh projecons seems a reasonable response as evdence accumulaes of a possble break n rend producvy growh. Noneheless, cauon s warraned unl producvy paerns have been observed for a longer me perod. Should he pace of echnologcal progress n hgh-ech ndusres dmnsh, economc growh would be h wh a double whammy slower oal facor producvy growh n mporan ndusres ha produce hgh-ech equpmen and slower capal accumulaon n oher secors ha nves n and use he hgh-ech equpmen. Boh facors have made mporan conrbuon o he recen success of he US economy, so ha any slowdown would reard fuure growh poenal A he same me we mus emphasze ha he uncerany surroundng nermedae erm projecons has become much greaer as a consequence of wdenng gaps n our knowledge, raher han changes n he volaly of economc acvy. The excellen research ha underles esmaes of prces and quanes of compuer nvesmen n NIPA has provded much needed llumnaon of he mpac of nformaon echnology. Bu hs s only par of he conrbuon of nformaon echnology o economc growh and may no be he larges par. As he role of echnology connues o ncrease, gnorance of he mos basc emprcal facs abou he nformaon economy wll plague researchers as well as forecasers. The unceranes abou pas and fuure economc growh wll no be resolved quckly. Ths s, of course, a guaranee ha he lvely economc debae now unfoldng wll connue for he foreseeable fuure The frs prory for emprcal research mus be consan-qualy prce ndexes for a wder varey of hgh-ech asses. These asses are becomng ncreasngly mporan n he US economy, bu only a small poron have consan-qualy prce deflaors ha ranslae he mproved producon characerscs no accurae measures of nvesmen and oupu. Ths echoes he earler fndngs of Gordon (1990), who repored ha offcal prce measures subsanally oversae prce changes for capal goods. In fac, Gordon denfed compuers and communcaons equpmen as wo asses wh he larges oversaemens, ogeher wh arcraf, whch we have no ncluded. 57 Much remans o be done o complee Gordon s program of mplemenng consan-qualy prce deflaors for all componens of nvesmen n NIPA The second prory for research s o decompose he sources of economc growh o he ndusry level. Forunaely, he requred mehodology requred s well esablshed and ncreasngly famlar. Domar aggregaon over ndusres underles back-of-he-envelope calculaons of he conrbuon of nformaon echnology o economc growh n Secon III, as well as he more careful and comprehensve vew of he conrbuons of ndusry-level producvy ha we have presened n Secon IV. Ths vew wll requre consderable refnemen o dscrmnae among alernave perspecves on he rapdly unfoldng nformaon economy. However, he evdence already avalable s nformave on he mos mporan ssue. Ths s he new economy vew ha he mpac of nformaon echnology s lke phlogson, an nvsble subsance ha splls over no every knd of economc acvy and reveals s presence by ncreases n 57. Gordon (1990), Table 12.3, p

34 ndusry-level producvy growh across he US economy. Ths vew s smply nconssen wh he emprcal evdence Our resuls sugges ha whle echnology s clearly he drvng force n he growh resurgence, famlar economc prncples can be appled. Producvy growh n he producon of nformaon echnology s responsble for a szable par of he recen spur n TFP growh and can be denfed wh prce declnes n hgh-ech asses and sem-conducors. Ths has nduced an erupon of nvesmen n hese asses ha s responsble for capal deepenng n he ndusres ha use nformaon echnology. Informaon echnology provdes a dramac llusraon of economc ncenves a work! However, here s no correspondng erupon of ndusry-level producvy growh n hese secors ha would herald he arrval of phlogson-lke spllovers from producon n he nformaon echnology secors Many of he goods and servces produced usng hgh-ech capal may no be adequaely measured, as suggesed n he already classc paper of Grlches (1994). Ths may help o explan he surprsngly low producvy growh n many of he hgh-ech nensve, servce ndusres. If he offcal daa are undersang boh real nvesmen n hgh-ech asses and he real consumpon of commodes produced from hese asses, he under-esmaon of U.S. economc performance may be far more serous han we have suggesed. Only as he sascal agences connue her slow progress owards mproved daa and mplemenaon of sae-of-he-ar mehodology wll hs murky pcure become more ransparen. 34

35 Appendx A - Esmang oupu 145. We begn wh he Naonal Income and Produc Accouns (NIPA) as our prmary source daa. These daa correspond o he mos recen benchmark revson publshed by he Bureau of Economc Analyss (BEA) on Ocober 29, These daa provde measures of nvesmen and consumpon, n boh curren and chaned 1996 dollars. The framework developed by Chrsensen and Jorgenson (1973), however, calls for a somewha broader reamen of oupu han n he naonal accouns. Mos mporan, consumers durable goods are reaed symmercally wh nvesmen goods, snce boh are long-lved asses ha are accumulaed and provde a flow of servces over her lfemes. We use a renal prce o mpue a flow of consumers durables servces ncluded n boh consumpon oupu and capal npu. We also employ a renal prce o make relavely small mpuaons for he servce flows from owner-occuped housng and nsuonal equpmen Table A-1 presens he me seres of oal oupu n curren dollars and he correspondng prce ndex from The able also ncludes he curren dollar value and prce ndex for nformaon echnology oupu componens compuer nvesmen, sofware nvesmen, communcaons nvesmens, compuer and sofware consumpon, and he mpued servce flow of compuer and sofware consumer durables as descrbed n Equaon (4) n he ex. Appendx B - Esmang capal servces ) Capal servces mehodology 147. We begn wh some noaon for measures of nvesmen, capal sock, and capal servces, for boh ndvdual asses and aggregaes. For ndvdual asses: I, = quany of nvesmen n asse a me P,, = prce of nvesmen n asse a me δ = geomerc deprecaon rae for asse S, = quany of capal sock of asse a me P, = prce of capal sock of asse a me K, = quany of capal servces from asse a me c, = prce of capal servces from asse a me where he subscrp refers o dfferen ypes of angble asses equpmen and srucures, as well as consumers durable asses, nvenores, and land, all for me perod For economy-wde aggregaes: I = quany ndex of aggregae nvesmen a me P I, = prce ndex of aggregae nvesmen a me 35

36 S = quany ndex of aggregae capal sock a me P S, = prce ndex of aggregae capal sock a me K = quany ndex of aggregae capal servces a me c = prce of capal servces a me q K, = qualy ndex of aggregae capal servces a me 149. Our sarng pon s nvesmen n ndvdual asses we assume ha he prce ndex for each asse measures nvesmen goods n dencally producve effcency uns over me. For example, he consan-qualy prce deflaors n he NIPA measure he large ncrease n compung power as a declne n prce of compuers. 58 Thus, a faser compuer s represened by more I, n a gven perod and a larger accumulaon of S,, as measured by he perpeual nvenory equaon: (B-1) S, = S, 1 (1 δ ) + I, = (1 δ ) τ = 0 where capal s assumed o deprecae geomercally a he rae δ Equaon (B-1) has he famlar nerpreaon ha he capal sock s he weghed sum of pas nvesmens, where weghs are derved from he relave effcency profle of capal of dfferen ages. Moreover, snce S, s measured n base-year effcency uns, he approprae prce for valung he capal sock s smply he nvesmen prce deflaor, P,.. Furhermore, S, represens he nsalled sock of capal, bu we are neresed n K,, he flow of capal servces from ha sock over a gven perod. Ths dsncon s no crcal a he level of ndvdual asses, bu becomes mporan when we aggregae heerogeneous asses. For ndvdual asses, we assume he flow of capal servces s proporonal o he average of he sock avalable a he end of he curren and pror perods: (B-2) K, = q ( S + S ) where q denoes hs consan of proporonaly, se equal o uny. Noe ha hs dffers from our earler work, e.g., Jorgenson (1990), Jorgenson and Sroh (1999), and Ho, Jorgenson, and Sroh (1999), where capal servce flows were assumed proporonal o he lagged sock for ndvdual asses Our approach assumes any mprovemen n npu characerscs, such as a faser processor n a compuer, s ncorporaed no nvesmen I, va deflaon of he nomnal nvesmen seres. Tha s, nvesmen deflaors ransform recen vnages of asses no an equvalen number of effcency uns of earler vnages. Ths s conssen wh he perfec subsuably assumpon across vnages and our use of he perpeual nvenory mehod, where vnages dffer n producve characerscs due o he age-relaed deprecaon erm., 2, 1 τ I, τ 58. See BLS (1997), parcularly Chaper 14, for deals on he qualy adjusmens ncorporaed no he producer prces ndexes ha are used as he prmary deflaors for he capal sock sudy. Cole e al. (1986) and Trple (1986, 1989) provde deals on he esmaon of hedonc regressons for compuers. 36

37 152. We esmae a prce of capal servces ha corresponds o he quany flow of capal servces va a renal prce formula. In equlbrum, an nvesor s ndfferen beween wo alernaves: earnng a nomnal rae of reurn,, on a dfferen nvesmen or buyng a un of capal, collecng a renal fee, and hen sellng he deprecaed asse n he nex perod. The equlbrum condon, herefore, s: (B-3) ( 1 δ + ) P, 1 = c, + (1 ) P, and rearrangng yelds a varaon of he famlar cos of capal equaon: (B-4) c, = ( π, ) P, 1 + δ P, where he asse-specfc capal gans erm s π, = ( P, P, 1) / P, Ths formulaon of he cos of capal effecvely ncludes asse-specfc revaluaon erms. If an nvesor expecs capal gans on hs nvesmen, he wll be wllng o accep a lower servce prce. Conversely, nvesors requre hgh servce prces for asses lke compuers wh large capal losses. Emprcally, asse-specfc revaluaon erms can be problemac due o wde flucuaons n prces from perod o perod ha can resul n negave renal prces. However, asse-specfc revaluaon erms are becomng ncreasngly mporan as prces connue o declne for hgh-ech asses. Jorgenson and Sroh (1999), for example, ncorporaed economy-wde asse revaluaon erms for all asses and esmaed a relavely modes growh conrbuon from compuers As dscussed by Jorgenson and Yun (1991), ax consderaons also play an mporan role n renal prces. Followng Jorgenson and Yun, we accoun for nvesmen ax creds, capal consumpon allowances, he sauory ax rae, propery axes, deb/equy fnancng, and personal axes, by esmang an asse-specfc, afer-ax real rae of reurn, r,, ha eners he cos of capal formula: c 1 ITC τ Z,, = r P + δ P + τ P 1 τ (B-5), [,, 1, ] p, 1 where ITC, s he nvesmen ax cred, τ s he sauory ax rae, Z, s he capal consumpon allowance, τ p s a propery ax rae, all for asse a me, and r, s calculaed as: (B-6) r, = β[(1 τ ) π, g ρ π, (1 q ) ] + (1 β ) e g (1 q ) α + (1 q )(1 α) where β s he deb/capal rao, s he neres cos of deb, ρ s he rae of reurn o equy, α s he dvdend payou rao, and g q and e q are he ax raes on capal gans and dvdends, respecvely. he nflaon rae for asse, whch allows r, o vary across asses. 59 π, s 59. A complcaon, of course, s ha ρ s endogenous. We assume he afer-ax rae of reurn o all asses s he same and esmae ρ as he reurn ha exhauss he paymen of capal across all asses n he corporae secor. In addon, ax consderaons vary across ownershp classes, e.g., corporae, non-corporae, and household. We accoun for hese dfferences n our emprcal work, bu do no go no deals here. See Jorgenson and Yun (1991, Chaper 2). 37

38 Equaons (B-1) hrough (B-6) descrbe he esmaon of he prce and quany of capal servces for ndvdual asses: P, and I, for nvesmen; P, and S, for capal sock; and c, and K, for capal servces. For an aggregae producon funcon analyss, we requre an aggregae measure of capal servces, ),..., (, 2,, 1 n K K K f K =, where n ncludes all ypes of reproducble fxed asses, consumers durable asses, nvenores, and land. We employ quany ndexes of o generae aggregae capal servces, capal sock, and nvesmen seres The growh rae of aggregae capal servces s defned as a share-weghed average of he growh rae of he componens: (B-7) K v K,, ln ln = where weghs are value shares of capal ncome: (B-8) + = K c K c K c K c v 1, 1, 1, 1,,,,,, 2 1 and he prce ndex of aggregae capal servces s defned as: (B-9) K K c c =,, 157. Smlarly, he quany ndex of capal sock s gven by: (B-10) S w S,, ln ln = where he weghs are now value shares of he aggregae capal sock: (B-11) + = S P S P S P S P w 1, 1, 1, 1,,,,,, 2 1 and he prce ndex for he aggregae capal sock ndex s: (B-12) S S S P P =,,, 158. Fnally, he aggregae quany ndex of nvesmen s gven by: 60. See Dewer (1980) and Fsher (1992) for deals.

39 (B-13) ln I = u, lni, where he weghs are now value shares of aggregae nvesmen: (B-14) u, = 1 2 P, P I,, I, + P, 1 P I, 1, 1 I, 1 and he prce ndex for he aggregae nvesmen ndex s: (B-15) P I, = P, I I, 159. The mos mporan pon from hs dervaon s he dfference beween he growh rae of aggregae capal servces, Equaon (B-7), and he growh rae of capal sock, Equaon (B-10); hs reflecs wo facors. Frs, he weghs are dfferen. The ndex of aggregae capal servces uses renal prces as weghs, whle he ndex of aggregae capal sock uses nvesmen prces. Asses wh rapdly fallng asse prces wll have relavely large renal prces. Second, as can be seen from Equaon (B-2), capal servces are proporonal o a wo-perod average sock, so he mng of capal servces growh and capal sock growh dffer for ndvdual asses. In seady-sae wh a fxed capal o oupu rao, hs dsncon s no sgnfcan, bu f asse accumulaon s eher accelerang or decelerang, hs mng maers A second pon o emphasze s ha we can defne an aggregae ndex of capal qualy, q K,, analogously o Equaon (B-2). We defne he aggregae ndex of capal qualy as q K, =K /((S +S -1 )/2), and follows ha he growh of capal qualy s defned as: (B-16) ln q K, = ln K ( S + S ln 2 1 ) ( S, + S = ( v ) ln, w, 2 1, ) 161. Equaon (B-16) defnes growh n capal qualy as he dfference beween he growh n capal servces and he growh n average capal sock. Ths dfference reflecs subsuon owards asses wh relavely hgh renal prce weghs and hgh margnal producs. For example, he renal prce for compuers s declnng rapdly as prces fall, whch nduces subsuon owards compuers and rapd capal accumulaon. However, he large deprecaon rae and large negave revaluaon erm mply ha compuers have a hgh margnal produc, so her renal prce wegh grealy exceeds her asse prce wegh. Subsuon owards asses wh hgher margnal producs s capured by our ndex of capal qualy. ) Invesmen and capal daa 162. Our prmary daa source for esmang aggregang he flow of capal servces s he Invesmen Esmaes of Fxed Reproducble Tangble Wealh, (BEA (1998b, 1998c)). These daa conan hsorcal cos nvesmen and chan-ype quany ndces for 47 ypes of non-resdenal asses, 5 ypes of resdenal asses, and 13 dfferen ypes of consumers durable asses from 1925 o Table B-1 shows 39

40 our reclassfcaon of he BEA daa no 52 non-resdenal asses, 5 resdenal asses, and 13 consumers durable asses Table B-2 presens he value and prce ndex of he broadly defned capal sock, as well as ndvdual nformaon echnology asses. Table B-3 presens smlar daa, bu for capal servce flows raher han capal socks. 62 The prce of capal socks for ndvdual asses n Table B-2 s he same as he nvesmen prce n Table A-1, bu he prces dffer for aggregaes due o dfferences beween weghs based on nvesmen flows and hose based on asse socks. The prce ndex for nvesmen grows more slowly han he prce ndex for asses, snce shor-lved asses wh subsanal relave prce declnes are a greaer proporon of nvesmen An mporan cavea abou he underlyng he nvesmen daa s ha runs only hrough 1997 and s no conssen wh he BEA benchmark revson n Ocober We have made several adjusmens o reflec he BEA revson, make he daa conssen wh our earler work, and exend he nvesmen seres o Frs, we have replaced he Tangble Wealh seres on compuers and perpherals equpmen and replaced wh he NIPA nvesmen seres for compuers and perpherals equpmen, n boh curren and chaned 1996 dollars. These seres were dencal n he early years and dffered by abou 5% n curren dollars n Smlarly, we used he new NIPA seres for nvesmen n sofware, communcaons equpmen, and for personal consumpon of compuers, perpherals, and sofware n boh curren and chaned 1996 dollars. These NIPA seres enable us o manan a complee and conssen me seres ha ncorporaes he laes benchmark revsons and he expanded oupu concep ha ncludes sofware Second, we have combned nvesmen n resdenal equpmen wh oher equpmen, a form of non-resdenal equpmen. Ths does no change he nvesmen or capal sock oals, bu reallocaes some nvesmen and capal from he resdenal o he non-resdenal caegory Thrd, we conrol he oal value of nvesmen n major caegores srucures, equpmen and sofware, resdenal srucures, and oal consumers durables o correspond wh NIPA aggregaes. Ths adjusmen manans a conssen accounng for nvesmen and purchases of consumers durables as npus and oupus. Compuer nvesmen, sofware nvesmen, communcaons nvesmen, and consumpon of compuers, perpherals, and sofware seres no adjused Fourh, we exended he nvesmen seres hrough 1998 based on NIPA esmaes. For example, he 1998 growh rae for oher fabrcaed meal producs, seam engnes, nernal combuson engnes, mealworkng machnery, specal ndusry machnery, general ndusral equpmen, and elecrcal ransmsson and dsrbuon equpmen were aken from he oher equpmen caegory n NIPA. The growh rae of each ype of consumers durables was aken drecly from NIPA These procedures generaed a complee me seres of nvesmen n 57 prvae asses (29 ypes of equpmen and sofware, 23 ypes of non-resdenal srucures, and 5 ypes of resdenal srucures) and consumpon of 13 consumers durable asses n boh curren dollars and chaned-1996 dollars from 1925 o For each asse, we creaed a real nvesmen seres by lnkng he hsorcal cos nvesmen and he quany ndex n he base-year Capal socks were hen esmaed usng he perpeual nvenory mehod n Equaon (B-1) and a geomerc deprecaon rae, based on Fraumen (1997) and repored n Table B Kaz and Herman (1997) and Fraumen (1997) provde deals on he BEA mehodology and underlyng daa sources. 62. Noe ha hese prce ndces have been normalzed o equal 1.0 n 1996, so hey do no correspond o he componens of he capal servce formula n Equaon (B-5). 40

41 169. Imporan excepons are he deprecaon raes for compuers, sofware, and auos. BEA (1998a) repors ha compuer deprecaon s based on he work of Olner (1993, 1994), s non-geomerc, and vares over me. We esmaed a bes-geomerc approxmaon o he laes deprecaon profle for dfferen ypes of compuer asses and used an average geomerc deprecaon rae of 0.315, whch we used for compuer nvesmen, sofware nvesmen, and consumpon of compuers, perpherals, and sofware. Smlarly, we esmaed a bes geomerc approxmaon o he deprecaon profle for auos of We also assembled daa on nvesmen and land o complee our capal esmaes. The nvenory daa come prmarly from NIPA n he form of farm and non-farm nvenores. Invenores are assumed o have a deprecaon rae of zero and do no face an nvesmen ax cred or capal consumpon allowance, so he renal prce formula s a smplfed verson of Equaon (B-5) Daa on land are somewha more problemac. Through 1995, he Federal Reserve Board publshed dealed daa on land values and quanes n s Balance Shees for he US Economy sudy (Federal Reserve Board (1995, 1997)), bu he underlyng daa became unrelable and are no longer publshed. We use he lmed land daa avalable n he Flow of Funds Accouns of he Uned Saes and hsorcal daa descrbed n Jorgenson (1990) o esmae a prce and a quany of prvae land. As a praccal maer, hs quany seres vares very lle, so s major mpac s o slow he growh of capal by assgnng a posve wegh o he zero growh rae of land. Lke nvenores, deprecaon, he nvesmen ax cred, and capal consumpon allowances for land are zero A fnal mehodologcal deal nvolves negave servce prces ha somemes resul from he use of asse-specfc revaluaon erms. As can be seen from he smplfed cos of capal formula n Equaon (B-5), an esmaed servce prce can be negave f asse nflaon s hgh relave o he neres and deprecaon raes. Economcally, hs s possble, mplyng capal gans were hgher han expeced. Negave servce prces make aggregaon dffcul so we made adjusmens for several asses. In a small number of cases for reproducble asses and nvenores, prmarly srucures n he 1970s, we used smoohed nflaon for surroundng years raher han he curren nflaon n he cos of capal calculaon. For land, whch showed large capal gans hroughou and has no deprecaon, we used he economy-wde rae of asse nflaon for all years. Appendx C - Esmang labor npu ) Labor npu mehodology 173. We agan begn wh some noaon for measures of hours worked, labor npus, and labor qualy for worker caegores: H j, = quany of hours worked by worker caegory j a me w j, = prce of an hour worked by worker caegory j a me L j, = quany of labor servces from worker caegory j a me and for economy-wde aggregaes: H = quany of aggregae hours worked a me W = average wage of hours worked a me 41

42 L = quany ndex of labor npu a me P L, = prce ndex of labor npu a me q L, = qualy ndex of labor npu a me 174. In general, he mehodology for esmang labor npu parallels capal servces, bu he lack of an nvesmen-ype varable makes he labor npu somewha more sraghforward. For each ndvdual caegory of workers, we begn by assumng he flow of labor servce s proporonal o hours worked: (C-1) L j, = ql, j H j, where q L,j s he consan of proporonaly for worker caegory j, se equal o uny The growh rae of aggregae labor npu s defned as he share-weghed aggregae of he componens as: (C-2) ln L = v j, ln L j, j where weghs are value shares of labor ncome: (C-3) v j, 1 = 2 j w j, w L j, j, L j, + j w j, 1 w L j, 1 j, 1 L j, 1 and he prce of aggregae labor npu s defned as: (C-4) P L, = j w j, L L j, 176. We defne he aggregae ndex of labor qualy, q L,, q L, =L /H, where H s he unweghed sum of labor hours: (C-5) H = H j, j 177. The growh n labor qualy s hen defned as: (C-6) ln q, L, = v j, ln H j j ln H 178. Equaon (C-6) defnes growh n labor qualy as he dfference beween weghed and unweghed growh n labor hours. As wh capal, hs reflecs subsuons among heerogeneous ypes of labor wh dfferen characerscs and dfferen margnal producs. As descrbed by Ho and Jorgenson (1999), one can furher decompose labor qualy no componens assocaed wh dfferen characerscs of labor, such as age, sex, and educaon. 42

43 ) Labor daa 179. Our prmary daa sources are ndvdual observaons from he decennal Censuses of Populaon for 1970, 1980, and 1990, he NIPA, and he annual Curren Populaon Survey (CPS). The NIPA provde oals for hours worked and he Census and CPS allows us o esmae labor qualy growh. Deals on he consrucon of he labor daa are n Ho and Jorgenson (1999). Table C-1 repors he prmary labor used n hs sudy, ncludng he prce, quany, value, and qualy of labor npu, as well as employmen, weekly hours, hourly compensaon, and hours worked Brefly, he Censuses of Populaon provde dealed daa on employmen, hours, and labor compensaon across demographc groups n census years. The CPS daa are used o nerpolae smlar daa for nervenng years and he NIPA daa provde conrol oals. The demographc groups nclude 168 dfferen ypes of workers, cross-classfed by sex (male, female), class (employee, self-employed or unpad), age (16-17, 18-24, 25-34, 45-54, 55-64,65+), and educaon (0-8 years grade school, 1-3 years hgh school, 4 years hgh school, 1-3 years college, 4 years college, 5+ years college). 63 Adjusmens o he daa nclude allocaons of mulple job-holders, an esmaon procedure o recover op-coded ncome daa, and brdgng o manan conssen defnons of demographc groups over me These dealed daa cover 1959 o 1995 and are aken from Ho and Jorgenson (1999). Ths allows us o esmae he qualy of labor npu for he prvae busness secor, general governmen, and governmen enerprses, where only he prvae busness secor ndex s used n he aggregae growh accounng resuls. For he years , we esmae labor qualy growh by holdng relave wages across labor ypes consan, and ncorporang demographc projecons for he labor force. Hours worked by employees are aken from he laes daa n he NIPA; hours worked by he self-employed are esmaed by Ho and Jorgenson (1999). Appendx D - Esmang ndusry-level producvy 182. Our prmary daa are annual me seres of ner-ndusry ransacons n curren and consan prces, ncludng fnal demands by commody, nvesmen and labor npus by ndusry, and oupu by ndusry. The frs buldng block s a se of ner-ndusry ransacons produced by he Employmen Projecons Offce a he Bureau of Labor Sascs (BLS). These daa repor nermedae npus and oal value-added (he sum of capal and labor npus and axes) for 185 ndusres from 1977 o A major advanage of hs BLS ner-ndusry daa s ha hey provde he necessary nerpolaons beween benchmark years We aggregae he daa from he Make and Use ables o generae ner-ndusry ransacons for 35 prvae busness ndusres a approxmaely he wo-dg Sandard Indusral Classfcaon (SIC) level. These ables enable us o generae growh raes of ndusry oupus, growh raes of nermedae npus, and shares of nermedae npus as needed n Equaon (29). They also provde conrol oals for value-added n each ndusry, he sum of he values of capal and labor servces and axes Esmaon of capal servces and labor npu follows he procedures descrbed above for each ndusry. We colleced nformaon from hree sources o esmae prces and quanes of capal and labor npus by ndusry. An ndusry-level breakdown of he value of capal and labor npu s avalable n he gross produc orgnang seres descrbed n Lum and Yuskavage (1997) of he BEA. Invesmens by asse classes and ndusres are from he BEA Tangble Wealh Survey (BEA (1998a), descrbed by Kaz 63. There s also an ndusry dmenson, whch we do no explo n hs aggregae framework, bu s used n he ndusry producvy analyss dscussed below. 43

44 and Herman (1997)). Labor daa across ndusres are from he decennal Census of Populaon and he annual Curren Populaon Survey. We use employ he prces and quanes of labor servces for each ndusry consruced by Ho and Jorgenson (1999) We also generae capal and labor servces for a Prvae Household secor and he Governmen secor. 64 For Prvae Households, he value of labor servces equals labor ncome n BLS s prvae household ndusry, whle capal ncome reflecs he mpued flow of capal servces from resdenal housng, consumers durables, and household land as descrbed above. For Governmen, labor ncome equals labor compensaon of general governmen employees and capal ncome s an esmae flow of capal servces from governmen capal. 65 Noe Governmen Enerprses are reaed as a prvae busness ndusry and are separae from he General Governmen. Appendx E - Exrapolaon for Table 2 presens prmary growh accounng resuls hrough 1998 and prelmnary esmaes for The daa hrough 1998 are based on he dealed mehodology descrbed n Appendxes A-D; he 1999 daa are exrapolaed based on currenly avalable daa and recen rends Our approach for exrapolang growh accounng resuls hrough 1999 was o esmae 1999 shares and growh raes for major caegores lke labor, capal, and nformaon echnology componens, as well as he growh n oupu. The 1999 labor share was esmaed from daa, hours growh are from BLS (2000), and labor qualy growh came from he projecons descrbed above. The 1999 growh raes of nformaon echnology oupus were aken from he NIPA, and shares were esmaed from daa. The 1999 growh raes of nformaon echnology npus were esmaed from recen nvesmen daa and he perpeual nvenory mehod, and shares were esmaed from daa. The 1999 growh of oher capal were esmaes from NIPA nvesmen daa for broad caegores lke equpmen and sofware, non-resdenal srucures, resdenal srucures, as well as consumers durable purchases; he ncome share was calculaed from he esmaed labor share. Oupu growh was esmaed from growh n BLS busness oupu and BEA GDP, wh adjusmen made for dfferen oupu conceps. Fnally, TFP growh for 1999 was esmaed as he dfference n he esmaed oupu growh and share-weghed npu growh. 64. The Prvae Household and Governmen secors nclude only capal and labor as npus. Oupu n hese secors s defned va a Tornqvs ndex of capal and labor npus, so producvy growh s zero by defnon. 65. BEA ncludes a smlar mpuaon for he flow of governmen capal servces n he naonal accouns, bu our mehodology ncludes a reurn o capal, as well as deprecaon as esmaed by BEA. 44

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51 TABLES AND FIGURES 51

52 Table 1: Average Growh Raes of Seleced Oupus and Inpus Prces Quanes Prces Quanes Oupus Prvae Domesc Oupu (Y ) Oher (Y n ) Compuer and Sofware Consumpon (C c ) Compuer Invesmen (I c ) Sofware Invesmen (I s ) Communcaons Invesmen (I m ) Compuer and Sofware CD Servces (D c ) Inpus Toal Capal Servces (K ) Oher (K n ) Compuer Capal (K c ) Sofware Capal (K s ) Communcaons Capal (K m ) Toal Consumpon Servces (D ) Non-Compuer and Sofware (D n ) Compuer and Sofware CD Servces (D c ) Labor (L ) Noes: CD refers o consumers durable asses. All values are percenages. 52

53 Table 2: Growh n U.S. Prvae Domesc Oupu and he Sources of Growh, Prelmnary* Growh n Prvae Domesc Oupu Growh (Y ) Conrbuon of Seleced Oupu Componens Oher (Y n ) Compuer and Sofware Consumpon (C c ) Compuer Invesmen (I c ) Sofware Invesmen (I s ) Communcaons Invesmen (I m ) Compuer and Sofware CD Servces (D c ) Conrbuon of Capal Servces (K ) Oher (K n ) Compuers (K c ) Sofware (K s ) Communcaons (K m ) Conrbuon of CD Servces (D ) Oher (D n ) Compuers and Sofware (D c ) Conrbuon of Labor (L ) Aggregae Toal Facor Producvy (TFP ) Growh of Capal and CD Servces Growh of Labor Inpu Conrbuon of Capal and CD Qualy Conrbuon of Capal and CD Sock Conrbuon of Labor Qualy Conrbuon of Labor Hours Average Labor Producvy (ALP ) Noes: A conrbuon of an oupu and an npu s defned as he share-weghed, real growh rae. CD refers o consumers durable asses. All values are percenages resuls nclude prelmnary esmaes for 1999; see he Appendx for deals on esmaon and daa sources. 53

54 Table 3: The Sources of ALP Growh, Varable Growh of Prvae Domesc Oupu (Y ) Growh n Hours (H ) Growh n ALP (Y/H ) ALP Conrbuon of Capal Deepenng ALP Conrbuon of Labor Qualy ALP Conrbuon of TFP Noes: ALP Conrbuons are defned n Equaon (3). All values are percenages. 54

55 Table 4: Impac of Alernave Deflaon of Sofware and Communcaons Equpmen on he Sources of U.S. Economc Growh, Base Case Moderae Prce Declne Rapd Prce Declne Growh n Prvae Domesc Oupu Growh (Y ) Conrbuon of Seleced Oupu Componens Oher (Y n ) Compuer and Sofware Consumpon (C c ) Compuer Invesmen (I c ) Sofware Invesmen (I s ) Communcaons Invesmen (I m ) Compuer and Sofware CD Servces (D c ) Conrbuon of Capal Servces (K ) Oher (K n ) Compuers (K c ) Sofware (K s ) Communcaons (K m ) Conrbuon of CD Servces (D ) Non-Compuers and Sofware (D n ) Compuers and Sofware (D c ) Conrbuon of Labor (L ) Aggregae Toal Facor Producvy (TFP ) Growh of Capal and CD Servces Growh of Labor Inpu Conrbuon of Capal and CD Qualy Conrbuon of Capal and CD Sock Conrbuon of Labor Qualy Conrbuon of Labor Hours Average Labor Producvy (ALP ) Noes: Base Case uses offcal NIPA prce daa. Moderae Prce Declne uses pre-packaged sofware deflaor for all sofware and annual prce changes of -10.7% for communcaons equpmen. Rapd Prce Declne uses annual prce changes of -16% for sofware and -17.9% for communcaons equpmen. See ex for deals and sources. A conrbuon s defned as he share-weghed, real growh rae. CD refers o consumers durable asses. All values are percenages. 55

56 Table 5: Informaon Technology Decomposon of TFP Growh for Alernave Deflaon Cases, Base Case Moderae Prce Declne Rapd Prce Declne Aggregae TFP Growh TFP Conrbuon Informaon Technology Compuers Sofware Communcaons Non-Informaon Technology Relave Prce Change Compuers Sofware Communcaons Average Nomnal Share Compuers Sofware Communcaons Noes: Base Case uses offcal NIPA prce daa. Moderae Prce Declne uses pre-packaged sofware deflaor for all sofware and -10.7% for communcaons equpmen. Rapd Prce Declne uses -16% for sofware and -17.9% for communcaons equpmen. See ex for deals and sources. A TFP conrbuon s defned as he shareweghed, growh rae of relave prces. 56

57 Table 6: Growh Raes of Oupu, Inpus, and Toal Facor Producvy Comparson of BLS, CBO, and Jorgenson-Sroh BLS Nonfarm Bus CBO Overall Economy CBO Nonfarm Busness Jorgenson-Sroh Real Oupu Labor Inpu Hours Worked Labor Qualy Capal Inpu TFP - no adjused for labor qualy TFP - adjused for labor qualy ALP Noe: CBO esmaes refer o "poenal" seres ha are adjused for busness cycle effecs. Growh raes do no exacly mach Table 5 snce dscree growh rae are used here for conssency wh CBO s mehodology. Hours worked for CBO Overall Economy refers o poenal labor force. 57

58 Table 7: 1996 Value-Added and Gross Oupu by Indusry SIC Value- Gross Indusry Codes Added Oupu Agrculure 01-02, Meal Mnng Coal Mnng Peroleum and Gas Nonmeallc Mnng Consrucon Food Producs Tobacco Producs Texle Mll Producs Apparel and Texles Lumber and Wood Furnure and Fxures Paper Producs Prnng and Publshng Chemcal Producs Peroleum Refnng Rubber and Plasc Leaher Producs Sone, Clay, and Glass Prmary Meals Fabrcaed Meals Indusral Machnery and Equpmen Elecronc and Elecrc Equpmen Moor Vehcles Oher Transporaon Equpmen Insrumens Mscellaneous Manufacurng Transpor and Warehouse Communcaons Elecrc Ules 491, % Gas Ules 492, %493, Trade , ,606.4 FIRE ,405.1 Servces 70-87, , ,542.8 Govermen Enerprses Prvae Households 88 1, ,248.4 General Governmen 1, ,028.1 Noe: All values are n curren dollars. Value-added refers o paymens o capal and labor; Gross oupu ncludes paymens for nermedae npus. 58

59 Table 8: Sources of U.S. Economc Growh by Indusry, Oupu Conrbuons of Inpus Producvy ALP Domar Indusry Growh Capal Labor Energy Maerals Growh Growh Wegh Agrculure Meal Mnng Coal Mnng Peroleum and Gas Nonmeallc Mnng Consrucon Food Producs Tobacco Producs Texle Mll Producs Apparel and Texles Lumber and Wood Furnure and Fxures Paper Producs Prnng and Publshng Chemcal Producs Peroleum Refnng Rubber and Plasc Leaher Producs Sone, Clay, and Glass Prmary Meals Fabrcaed Meals Indusral Machnery and Equpmen Elecronc and Elecrc Equpmen Moor Vehcles Oher Transporaon Equpmen Insrumens Mscellaneous Manufacurng Transpor and Warehouse Communcaons Elecrc Ules Gas Ules Trade FIRE Servces Govermen Enerprses Prvae Households General Governmen Oupu Growh s he average annual growh n real gross oupu. Conrbuons of Inpus are defned as he average, share-weghed growh of he npu. Producvy Growh s defned n Equaon (8). ALP Growh s he growh n average labor producvy. Domar Wegh s he average rao of ndusry gross oupu o aggregae value added as defned n Equaon (9). All numbers excep Domar Weghs are percenages. 59

60 Char 1: Relave Prces of Informaon Technology Oupus, ,000 1,000 Log Scale (1996=1) Compuer Invesmen 0 Communcaons Invesmen Compuer and Sofware CD Servces Noes: All prces ndexes are relave o he oupu prce ndex. Year Sofware Invesmen Compuer and Sofware Consumpon 60

61 1.8 Char 2: Oupu Shares of Informaon Technology, % Year Compuer Invesmen Sofware Invesmen Communcaons Invesmen Compuer and Sofware Consumpon Compuer and Sofware CD Servces Noes: Share of curren dollar oupu. 61

62 Char 3: Inpu Shares of Informaon Technology, % Year Compuer Capal Sofware Capal Communcaons Capal Compuer and Sofware CD Servces Noes: Share of curren dollar capal and consumers durable servces. 62

63 Char 4: Sources of U.S. Economc Growh, Annual Conrbuon (%) Capal and CD Servces Labor Inpu TFP Noes: An npu s conrbuon s he average share-weghed, annual growh rae. TFP defned n Equaon (2) n ex. 63

64 Char 5: Oupu Conrbuon of Informaon Technology, Annual Conrbuon (%) Non-IT Oupu IT Oupu Noes: An oupu s conrbuon s he average share-weghed, annual growh rae. 64

65 Char 6: Oupu Conrbuon of Informaon Technology Asses, Annual Conrbuon (%) Compuer and Sofware Consumpon Compuer Invesmen Sofware Invesmen Communcaons Invesmen Compuer and Sofware CD Servces Noes: An oupu s conrbuon s he average share-weghed, annual growh rae. 65

66 Char 7: Inpu Conrbuon of Informaon Technology, Annual Conrbuon (%) Non-IT Capal and CD Servces IT Capal and CD Servces Noes: An npu s conrbuon s he average share-weghed, annual growh rae. 66

67 Char 8: Inpu Conrbuon of Informaon Technology Asses, Annual Conrbuons (%) Compuer Capal Sofware Capal Communcaons Capal Compuer and Sofware CD Noes: An npu s conrbuon s he average share-weghed, annual growh rae. 67

68 Char 9: Sources of U.S. Labor Producvy Growh, Annual Conrbuon (%) Capal Deepenng Labor Qualy TFP Noes: Annual conrbuons are defned n Equaon (3) n ex. 68

69 Char 10: TFP Decomposon for Alernave Deflaon Cases Base Case Moderae Prce Declne Rapd Prce Declne 0.8 Annual Conrbuon (%) Informaon Technology Non-Informaon Technology Noes: Annual conrbuon of nformaon echnology s he share-weghed declne n relave prces. 69

70 Char 11: Indusry Conrbuons o Aggregae Toal Facor Producvy Growh, Servces Consrucon Peroleum and Gas FIRE Gas Ules Govermen Enerprses Prnng and Publshng Meal Mnng Tobacco Producs General Governmen Prvae Households Leaher Producs Lumber and Wood Nonmeallc Mnng Coal Mnng Furnure and Fxures Sone, Clay, and Glass Oher Transporaon Equpmen Prmary Meals Mscellaneous Manufacurng Elecrc Ules Paper Producs Moor Vehcles Rubber and Plasc Peroleum Refnng Texle Mll Producs Insrumens Apparel and Texles Fabrcaed Meals Chemcal Producs Communcaons Food Producs Transpor and Warehouse Indusral Machnery and Equpmen Agrculure Elecronc and Elecrc Equpmen Trade. Each ndusry s conrbuon s calculaed as he produc of ndusry producvy growh and he ndusry Domar wegh, averaged for

71 Table A-1: Prvae Domesc Oupu and Hgh-Tech Asses Prvae Domesc Compuer Sofware Communcaons Compuer & Sofware Compuer & Sofware Oupu Invesmen Invesmen Invesmen Consumpon Consumpon Servces Year Value Prce Value Prce Value Prce Value Prce Value Prce Value Prce , , , , , , , , , , , , , , , , , , , , , , , , , , , Noes: Values are n bllons of curren dollars. All prce ndexes are normalzed o 1.0 n

72 Table B-1: Invesmen and Capal Sock by Asse Type and Class Geomerc 1998 Deprecaon Capal Asse Rae Invesmen Sock Toal Capal na 27,954.7 Fxed Reproducble Asses na 4, ,804.2 Equpmen and Sofware ,082.0 Household furnure Oher furnure Oher fabrcaed meal producs Seam engnes Inernal combuson engnes Farm racors Consrucon racors Agrculural machnery, excep racors Consrucon machnery, excep racors Mnng and olfeld machnery Mealworkng machnery Specal ndusry machnery, n.e.c General ndusral, ncludng maerals handl Compuers and perpheral equpmen Servce ndusry machnery Communcaon equpmen Elecrcal ransmsson, dsrbuon, and nd Household applances Oher elecrcal equpmen, n.e.c Trucks, buses, and ruck ralers Auos Arcraf Shps and boas Ralroad equpmen Insrumens (Scenfc & engneerng) Phoocopy and relaed equpmen Oher nonresdenal equpmen Oher offce equpmen Sofware Non-Resdenal Srucures 2, ,430.6 Indusral buldngs Moble srucures (offces) Offce buldngs Commercal warehouses Oher commercal buldngs, n.e.c Relgous buldngs Educaonal buldngs

73 Table B-1: Invesmen and Capal Sock by Asse Type and Class - connued Geomerc 1998 Deprecaon Capal Asse Rae Invesmen Sock Hospal and nsuonal buldngs Hoels and moels Amusemen and recreaonal buldngs Oher nonfarm buldngs, n.e.c Ralroad srucures Telecommuncaons Elecrc lgh and power (srucures) Gas (srucures) Local rans buldngs Peroleum ppelnes Farm relaed buldngs and srucures Peroleum and naural gas Oher mnng exploraon Oher nonfarm srucures Ralroad rack replacemen Nuclear fuel rods Resdenal Srucures , o-4-un homes , or-more-un homes Moble homes Improvemens , Oher resdenal Consumers Durables , Auos Trucks Oher (RVs) Furnure Kchen Applance Chna, Glassware Oher Durable Compuers and Sofware Vdeo, Audo Jewelry Ophhalmc Books and Maps Wheel Goods Land , Invenores , Noe: Values of nvesmen and capal sock s n mllons of curren dollars. Equpmen and Sofware and Oher nonresdenal equpmen ncludes NIPA resdenal equpmen. Source: BEA (1998a, 1999b, 1999c) and auhor calculaons. 73

74 Table B-2: Toal Capal Sock and Hgh-Tech Asses Toal Sock of Compuer Sofware Communcaons Compuer & Sofware Capal and CD Asses Capal Sock Capal Sock Capal Sock CD Sock Year Value Prce Value Prce Value Prce Value Prce Value Prce , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Noes: Values are n bllons of curren dollars. Toal capal sock ncludes reproducble asses, consumers durable asses (CD), land, and nvenores. All prce ndexes are normalzed o 1.0 n

75 Table B-3: Toal Capal Servces and Hgh-Tech Asses Toal Servce Flow from Compuer Sofware Communcaons Compuer & Sofware Capal and CD Asses Capal Servce Flow Capal Servce Flow Capal Servce Flow CD Servce Flow Year Value Prce Value Prce Value Prce Value Prce Value Prce , , , , , , , , , , , , , , , , , , , Noe: Values are n bllons of curren dollars. Servce prces are normalzed o 1.0 n durable asses (CD), land, and nvenores. All prce ndexes are normalzed o 1.0 n Toal servce flows nclude reproducble asses, consumers 75

76 Table C-1: Labor Inpu Labor Inpu Weekly Hourly Hours Year Prce Quany Value Qualy Employmen Hours Compensaon Worked , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,951 Noes: Quany of labor npu s measured n bllons of 1996 dollars; value of labor npu s measured n bllons of curren dollars. Employmen s housands of workers, hourly compensaon s n dollars, and hours worked s n mllons. Prce of labor npu and ndex of labor qualy are normalzed o 1.0 n

77 ECONOMICS DEPARTMENT WORKING PAPERS 260. Summary of an Informal Workshop on he Causes of Economc Growh (Ocober 2000) Jonahan Temple 259. Knowledge, Technology and Economc Growh: Recen Evdence from OECD Counres (Ocober 2000) Andrea Bassann, Sefano Scarpea and Ignazo Vsco 258. Average Effecve Tax Raes on Capal, Labour and Consumpon (Ocober 2000) Davd Carey and Harry Tchlnguran 257. The Healh Care Sysem n Poland (Sepember 2000) Nahale Grouard and Yuaka Ima 256. Publc Expendure Reform: The Healh Care Secor n he Uned Kngdom (Augus 2000) Vncen Koen 255. Regulaory Reform n Road Fregh and Real Dsrbuon (Augus 2000) Olver Boylaud 254. Regulaon, Marke Srucure and Performance n Ar Passenger Transporaon (Augus 2000) Rauf Gonenc and Guseppe Ncole 253. Polcy Inerdependence durng Economc Transon: he Case of Slovaka (June 2000) Joaqum Olvera Marns and Trsan Prce 252. E-Commerce: Impacs and Polcy Challenges (June 2000) Jonahan Coppel 251. The Implemenaon and he Effecs of Regulaory Reform: Pas Experence and Curren Issues (June 2000) Rauf Gonenc, Mara Maher and Guseppe Ncole 250. The Concep, Polcy Use and Measuremen of Srucural Unemploymen: Esmang a Tme Varyng NAIRU across 21 OECD Counres (June 2000) Pee Rchardson, Laurence Boone, Claude Gorno, Mara Meacc, Davd Rae and Davd Turner 249. Opons for Reformng he Spansh Tax Sysem (June 2000) Isabelle Joumard and Arsomène Varoudaks 248. Economc Growh n he OECD Area: Recen Trends a he Aggregae and Secoral Level (June 2000) Sefano Scarpea, Andrea Bassann, Drk Pla and Paul Schreyer 247. Economc Effecs on he 1999 Turksh Earhquakes: an Inerm Repor (June 2000) Alexandra Bbbee, Rauf Gonenc, Sco Jacobs, Josef Konvz and Rober Prce 246. Polcy Influences on Economc Growh n OECD Counres: an Evaluaon of he Evdence (June 2000) Sanghoon Ahn and Phlp Hemmngs 245. The Tax Sysem n he Czech Republc (May 2000) Chara Bronch and Andrew Burns 244. The Tax Sysem n Norway: Pas Reforms and Fuure Challenges (May 2000) Paul van den Noord 77

78 243. A Changng Fnancal Envronmen and he Implcaons for Moneary Polcy (May 2000) Paul Mylonas, Sebasan Schch, Ger Wehnger 242. Carbon Emsson Leakages: a General Equlbrum Vew (May 2000) Jean-Marc Burnaux and Joaqum Olvera Marns 241. The Healhcare Sysem n Hungary (Aprl 2000) Eva Orosz and Andrew Burns 240. Comparng Sem-Srucural Mehods o Esmae Unobserved Varables: he HPMV and Kalman Flers Approaches (Aprl 2000) Laurence Boone 239. New Issues n Publc Deb Managemen: Governmen Surpluses n Several OECD Counres, he Common Currency n Europe and Rapdly Rsng Deb n Japan (Aprl 2000) Paul Mylonas, Sebasan Schch, Thorsenn Thorgersson and Ger Wehnger 238. Regulaon, Indusry Srucure and Performance n he Elecrcy Supply Indusry (Aprl 2000) Faye Sener 237. Regulaon, Marke Srucure and Performance n Telecommuncaons (Aprl 2000) Olver Boylaud and Guseppe Ncole 236. Predcng he Evoluon and Effecs of he Asa Crss from he OECD Perspecve (Aprl 2000) Pee Rchardson, Ignazo Vsco and Claude Gorno 235. Modellng Manufacurng Expor Volumes Equaons A Sysem Esmaon Approach (Aprl 2000) Keko Muraa, Davd Turner, Davd Rae and Laurence Le Fouler 234. The Polsh Tax Reform (March 2000) Parck Lenan and Leszek Baroszuk 233. The Tax Sysem n Mexco: a Need for Srenghenng he Revenue Rasng Capacy (March 2000) Thomas Dalsgaard 232. EMU, he Euro and he European Polcy Mx (February 2000) Jonahan Coppel, Marne Durand and Ignazo Vsco 231. The Tax Sysem n Japan: a Need for Comprehensve Reform (February 2000) Thomas Dalsgaard and Masaak Kawagoe 230. The Sze and Role of Auomac Fscal Sablsers n he 1990s and Beyond (January 2000) Paul van den Noord 229. Enhancng Envronmenally Susanable Growh n Fnland (January 2000) Ann Vourc h and Mguel Jmenez 228. Fnance and Growh: Some Theorecal Consderaons, and a Revew of he Emprcal Leraure (January 2000) Koaro Tsuru 227. Wha he Yeld Curves Say abou Inflaon: Does I Change over Tme? (December 1999) Sebasan Schch 78