Speech

Perspectives on Productivity “TheNewEconomyinaNewCentury:ImpactsofTechnologyonWhatandHowWeTeach” AconferencesponsoredbytheOfficeofEconomicEducationandBusinessResearch,SIUE South-WesternCollegePublishing SouthernIllinoisUniversity–Edwardsville Edwardsville,Illinois April7,2000 What in the world has happened in wemustdigintoitifwearetomakeprogressin theUnitedStatestoraiseeconomic understandingthekeydisputesoverwhetherwe growthsosubstantiallyduringthe reallyare,orarenot,livingina“new”economy. last few years? Real output has Beforeproceeding,Iwanttoemphasizethat risen beyond virtually all forecasts; unemploy- theviewsIexpressherearemineanddonot ment has fallen to levels that only a few years necessarilyreflectofficialpositionsoftheFederal ago were thought to be unattainable; labor pro- ReserveSystem.Ithankmycolleaguesatthe ductivitygrowthhasincreasedtorateslastexpe- FederalReserveBankofSt.Louisfortheircom- riencedmanyyearsago,duringthe“GoldenAge” ments—especiallyDickAnderson,whoisaco- of 1950-73; and inflation has remained low and authorofthisspeech.Iretainfullresponsibility evenfallenslightly.Thisunlikelycoincidenceof forerrors. economic outcomes has led some observers to conclude that the economy has entered a “New Age.” In this age, technical progress in infor- MEASURING PRODUCTIVITY: mation and communication technology—often AVERAGE LABOR PRODUCTIVITY referred as “ICT” for short— has, some believe, removedallpreviousspeedlimitsontheeconomy. Tobeginourdiscussion,letmeposethis Fromthistimeforward,potentialrealoutputwill question:Whatdowemeanby“productivity?” grow more rapidly than in the past, and the Themostcommonlydiscussedmeasureislabor unemployment rate will be forever lower. And, productivity.Laborproductivityissimplythe even more remarkably, these events will occur outputofeitheranindustryortheaggregateecon- without any expansionary monetary policy that omydividedbylaborinput.Achangeinlabor might raise fears of higher inflation. productivityreflectsanychangeinoutputthat PerhapsI’veofferedanoverblownpictureof cannotbeaccountedforbyachangeinlabor thestorysometell,butmycharacterizationisnot input;suchchangesmaybedue,forexample,to overblownbymuch.Mygoaltonightistobring changesintheamountofcapitalusedperperson someperspectivetotheseeventsbyaskinghow employed. unusualtheyarewithinbothU.S.historyand Istartwiththisdefinitionalpointbecause relativetotheexperienceofothercountriesduring mostpopulardiscussionsofproductivitylaunch the1990s.I’llconcentrateontheproductivitypart rightintotheanalysisofthegloriousneweconomy ofthestory,forthatparthascertainlycaptured withoutnotinghowimportantthedefinitionisto everyone’sattention.Iwilldistinguishcarefully theanalysis.Ittakesonlyhalfasecondofthought betweenlaborproductivityandtotalfactorpro- tounderstandthatitreallymatterswhethera ductivity.Thisissuemaysoundtechnical,but ditchdigger’shigherproductivitycomesfrom 1 ECONOMICGROWTH substitutingabackhoeforashovelorforsome therateofinvestmentinnewphysicalcapital,and otherreason. thegrowthrateoflaborproductivity.Hestresses Let’sstartwithafewnumbers.Laborproduc- thattechnologicalinnovationstypicallyareput tivitygrowthintheUnitedStateshasrisenduring intoservice“embodied”innewcapitalequip- thelastseveralyears.Usingannualaveragedata, ment.Incontrast,newwaysofdoingthingsthat in1999laborproductivity—outputperhourof enhancetheproductivityoftheexistingcapital laborinput—increased3.0percentinthenonfarm stockrarelyhavelargeeffects.Stronginvestment businesssector.During1998,theincreasewas spendingbefore1973,bothintheUnitedStates 2.8percent;during1997,2.0percent.Thegrowth andworldwide,contributedtorapidproductivity oflaborproductivityisnotonlyhigherthanit growthbydisseminatingnewtechnology.World- usedtobe,butforeachofthethreemostrecent wideinvestmentspendingslowedsharplyafter yearsithasbeenhigherthanthepreviousyear. 1973,andwithitworldwidelaborproductivity Howunusualisthishigherrateoflaborpro- growth.Thereboundofbusinessinvestment ductivitygrowth?TheavailableU.S.historical duringthe1990s,bothintheUnitedStatesand data,beginningin1929,showthatlaborproduc- Europe,cameatatimeofmajortechnicalprogress tivitygrowthishighlyvolatile.Increasesofthis (andpricedecreases)intheproductionofsemi- sizeintheannualgrowthrateforayearortwo conductorsandcomputers.Thisinvestment arenotunusualinthisrecord,especiallyduring reboundhasundoubtedlycontributedtothe theearlyyearsofbusinesscyclerecoveries.But, recentincreaseoflaborproductivitygrowth. suchincreasesarehighlyunusualduringthelater Changesinlaborproductivityinforeigncoun- yearsofaneconomicexpansion.Themostrecent triesprovideasecondyardstickagainstwhichto EconomicReportofthePresident,forexample, judgewhethertherecentgrowthofU.S.labor notesthatlaborproductivityinthenonfarmbusi- productivityisunusualornot.Letmecautionyou, nesssectorincreasedbyonly1.3percentand1.1 however,thatnotallmeasuresoflaborproduc- percentperyear,respectively,duringthefinaltwo tivityarethesame.IntheUnitedStates,themost yearsoftheexpansionsthatendedinlate1969 commonlydiscussedmeasureistheoneproduced and1990. bytheProductivitySectionoftheBureauofLabor Longer-runcomparisonsalsosuggestthat Statistics.Inthismeasure,thenumeratoristhe somethingunusualhasoccurred.During1950-73, outputofthenonfarmbusinesssectorandthe forexample—theso-called“GoldenAge”ofU.S. denominatoristotalhoursofworkbyemployees productivitygrowth—laborproductivityinthe inthatsector.InEuropeanpublications,however, nonfarmbusinesssectorincreasedatacompound themostcommonlycitedmeasureistheratioof averageannualrateofapproximately3percent. aggregaterealGDPtothenumberofemployed From1973through1995,productivitygrowth slowedtoabouta1percentpace.Duringthelast persons.Evenmoreconfusing,insomepublica- twoyears,laborproductivitygrowthhasreturned tions,analystsfocusonrealGDPpercapita, toitsGoldenAgerate.Thequestionsoftheday ratherthanperemployedperson,asameasure are:Whydidlaborproductivitygrowthrise? ofproductivity. Willthehigherratecontinue? APh.D.ineconomicsisnotrequiredto Onehypothesisisthattheresurgenceoflabor appreciatethatthesevariousmeasuresoflabor productivitygrowthiscloselyconnectedtothe productivitywilldifferwhenvariablessuchas strongpaceofbusinessequipmentinvestment thenumberofannualhoursperemployeeor duringthe1990s,bothintheUnitedStatesand thepercentageoftheworking-agepopulation Europe.AngusMaddison,thewell-knowneco- employeddifferacrosscountries.TheU.S.Bureau nomicgrowthhistorian,hasdemonstratedstrong ofLaborStatisticsisoneofthefewagenciesthat longer-runcorrelationsamongthreevariablesin seekstoadjustforthesedifferencesandprovide aneconomy:thepaceoftechnologicalinnovation, consistentcross-countrycomparisons. 2 PerspectivesonProductivity Unfortunately,duetodatalimitations,the mentintheservicesindustries.Suchstudiesare BLSpublishesthecomparativestatisticsonly hamperedbythefactthatoutputofthesesectors onceeachyearandincludesonlymanufacturing. islesswell-measuredthanthatofmanufacturing. FortheUnitedStates,from1990to1998,labor Thestudiesgenerallyhavereachedsimilarcon- productivityinmanufacturingshowsa3.3per- clusions,however:Servicesectorshaveextensively centannualgrowthrateofoutputperhour.For purchasednewICTequipmentanddeployedit certaincountries,therateismorerapid:4.6per- toincreaselaborproductivity,bothintheUnited centforSweden,3.9percentforFrance,and3.8 StatesandEurope. percentfortheNetherlands.Forsomeothersitis slower:3.2percentforGermany,3.0percentfor JapanandBelgium,2.2percentfortheUnited MEASURING PRODUCTIVITY: Kingdom,and2.0percentforCanada.Onan TOTAL FACTOR PRODUCTIVITY annualbasis,thedataareerratic:manufacturing Tothispoint,Ihaveconcentratedonlabor productivitygrowthintheUnitedStates,forexam- productivity.Thecontributionstooutputofother ple,risesto6.1percentin1995,slowsto2.1per- inputs,includingphysicalcapital,havebeen centin1996,andrisesagainto4.1percentinboth ignored.Forsomepurposesandduringsome 1997and1998.Insomeindividualyearssince timeperiods,theseomissionsmightbeunimpor- 1995,growthratesforothercountriesagainexceed tant.Unfortunately,asIhintedintheintroduction theU.S.rate:7.2percentforFranceand5.9per- ofthisspeech,thisisnotoneofthoseperiods. centforGermanyin1997and4.3percentfor Theoutstandingfactofthepastdecadeisthe Germanyin1998. sharpfallinthepriceofICTrelativetotheprices Inpart,cross-countrydifferencesreflectdiffer- ofotherproductiveinputs.Totheextentthat entstagesoftherespectivebusinesscycles.In thesepricedecreaseshaveinducedfirmstosub- addition,fluctuationsininternationaleconomic stituteICT-typecapitalforlabor,thestoryofthe conditionsmakecomparisonsduringthe1990s “neweconomy”isoneofinputsubstitution,not tenuous.Ingeneral,Europeannationshavebeen productivitygrowth.Althoughditchdiggersmay morestronglyaffectedbyinternationaleconomic nothavebiggerandbetterbackhoes,mostworkers crisessuchasoccurredinMexicoin1995,East havebeenequippedwithbettercommunications Asiain1997,andRussiain1998.Onbalance, equipment,bettercomputers,andbettersoftware. though,comparisonsofU.S.andEuropeanpro- Recallthatchangesinlaborproductivity ductivitygrowthsuggestsimilarpatterns. reflectallchangesinoutputthatcannotbeattrib- Additionalconfirmationofthecommon utedtochangesinlaborinput.Changesininput impactofICTtechnologyisevidentinacompari- pricesthatinducesubstitutionbyfirmsofcapital sonoftheanalysisinthemostrecentEconomic forlaborwillincreasemeasuredlaborproductiv- ReportofthePresidentwithsimilaranalysisin ity.(Ofcourse,ifoutputandsalesdonotincrease theEuropeanUnion’sDecember1999Joint sufficiently,higherproductivitywillalsoresult EmploymentReport.Bothreportsareconcerned infewerworkersinthatfirmorindustry,ashas withrestructuring,layoffsofworkers,andthe beenthecontinuingcaseinagriculturefor150 needfor“lifelong”educationtoadapttoachang- years.)Thesesubstitutions,however,arenotwhat ingworld.TheEU’sEmploymentReportalso economistscommonlyrefertoas“technical reviewsthelargenumberofinitiativesbymem- change,”noraretheylikelytoincreasethelong- bernationstopromoteentrepreneurshipinthe termtrendgrowthoftheeconomy’spotential new“informationsociety,”includingeasingthe output.Instead,weneedtomeasuretheeffectof administrativeburdensthathamperjobcreation newtechnologyonoutputafteraccountingforall bysmallbusiness. thegrowthofinputduetoincreasesinbothcapital Finally,Imustnotethatanincreasingnumber andlabor.Theconceptoftotalfactorproductivity ofstudieshaveaddressedtheroleofICTinvest- seekstodoso. 3 ECONOMICGROWTH Totalfactorproductivitymeasureschanges Akeyfindingfromthisresearchisthatthe inoutputrelativetoanindexnumberthatmeas- outstandingfactintheUnitedStatessince1995 uresthecombinedinputsoflaborandcapital. hasbeena28percentperyeardecreaseinthe Changesintotalfactorproductivityreflectchanges costsofICTequipment,qualityadjusted.These intheorganizationofproductionorintechnology studiesconcludethattheoverwhelmingfactor thatarenotduetochangesineitherlaboror behindtheincreaseinU.S.laborproductivity capitalinputs. duringthe1990shasbeentheincreaseinthe Theconceptoftotalfactorproductivityis capital/laborratio.Althoughdifferinginthe notnew.EconomistsoftenrefertoTFPasthe details,thesestudiesonbalanceconcludethat “Solowresidual,”followingfromRobertSolow’s totalfactorproductivitygrowthhasincreased seminal1956growththeoryarticle.But,tounder- moderatelysince1995,andinthepastthreeyears hascontributedperhaps0.75to1percentagepoint standTFP,wemustbackuponestep:Whatdo ofthegrowthofaggregaterealGDP. wemeanby“capital”?Inearlygrowththeory Ifconfirmedbyfurtherresearch,theseresults research,suchasSolow’s1956and1957articles haveimportantimplicationsforthefuture.In andEdwardDenison’slaterworkongrowth particular,theresultsresurrectacommontheme accounting,physicalcapitalwastakentobea inthegrowththeoryliteratureofthelast45years: homogenousinput.Thatis,intheanalysis,differ- thecriticalimportanceofnotconfusingchanges entvintagesofcapitalwerenotseparated.Many inlevelswithchangesinratesofgrowth.Sharp, analystshavearguedthatthiswas(andis)aseri- unexpecteddecreasesinthepriceofanimportant ousmistake.Newtechnologyisprimarilyputinto input—ICTequipment—mayinducealong-lasting, useintheformofnewphysicalcapital,anddiffer- perhapspermanent,increaseintheleveloflabor ingvintagesofcapitalmustbeadjustedcarefully productivityandpotentialoutput.Butthesame fortheirproductivecapacity.Ironically,Robert decreasesmaysuggestlittleornoincrease,except Solowhimselfarguedforthispointofviewin fornear-termadjustments,inthegrowthrateof threelaterarticles,publishedbetween1960and eitherlaborproductivityorpotentialoutput.For 1963. thegrowthrateitselftobepermanentlyhigher,the Inrecenteconometricstudiesoftotalfactor rapiddeclineinthepriceofICTequipmentand productivity,laborandcapitalinputshavebeen consequentcontinuingincreaseinthecapital/ measuredwithindex-numbermethodssimilar laborratiowouldhavetobepermanent. tothoseintroducedbytheBureauofEconomic Inrelated,widelypublicizedresearch,Robert Analysisin1995tomeasurerealGDP.Suchmeas- GordonhasarguedthatalloftheU.S.economy’s uresareparticularlyappropriatewhenseveral productivitygainduringthe1990sisdueto typesofeachinputmustbeincluded—suchas improvementsintheproductionofcomputers, workerswithdifferingamountsofeducationor ormorespecifically,intheproductionofthesemi- severaldifferentvintagesofphysicalcapital— conductorcomponentsofcomputers.Heargues andtherelativepricesofthevariousinputsare thatmostothersegmentsoftheeconomyhave changing.Theeconometricmethodsattemptto experiencedlittle,ifany,gainfromtheuseof separatechangesinlaborproductivityintotwo computers.Althoughthesemorerecenteconomet- parts:thepartduetotheincreaseintheamount ricresultssuggestsomewhathighertotalfactor ofcapitalperunitoflaborandthepartdueto productivitygrowththanGordon’sestimates, organizationalchangespermittedbynewtech- theyareconsistentwithGordon’sfindings.In nology.Thefirstpartmeasurestheincreaseinout- sectorsoutsidesemiconductormanufacturing, putasaconsequenceoftheapplicationofmore theimprovementincomputershasinducedthe capital.Thesecondpartisthe“Solowresidual,” substitutionoflessexpensiveformoreexpensive thatpartofadditionaloutputwhichisnot inputs;net(econometrically)oftheinputsubsti- accountedforbyinputsoflaborandcapital. tutioneffect,mostofthesesectorshavegained 4 PerspectivesonProductivity littlefromthenewtechnology.Thatis,newtech- Thesedevelopmentsareobviouslyextremely nologyhasnotshiftedtheproductionfunctionin important.Theywillpermanentlyincreasethe thesesectorsbuthassimplyledtotheapplication leveloflaborproductivity.Butgivenourcurrent ofmorecapitalperunitoflabortotheproduction understandingoftheseissues,theyareunlikely process.Semiconductormanufacturing,onthe toyieldapermanentlyhighergrowthrateofpro- otherhand,hasbenefitedsignificantlybecause ductivity.Itseemsprobabletomethateventually— theoutputofthatsector—bettercomputers—isa althoughIhavenoideawhen—thetechnical veryimportantinputtothesamesector:new, advancesthathavebeencreatingthesharp morepowerfulcomputersareessentialtothe declinesinthepriceofcomputingpowerwill designandmanufactureofevennewer,more slow,perhapsasaconsequenceoffundamental powerfulcomputers.Inturn,thesecomputers lawsofphysicsthatcontrolhowmanytransistors willeasetheproductionofevennewermachines. canbepackedontomicrochips.Whentheprice Asnewercomputerscontinuetoenhanceour declineofcomputingpowerslows,theapplica- abilitytodesignandbuildevermorepowerful tionofadditionalcomputingpowerperunitof machines,the“perunit”costofcomputinglikely laborwillslow,andsoalsowilltherateofgrowth willcontinuetodecrease.In1990,theper-unit oflaborproductivity.Butletmeemphasizeagain decreaseinthepriceofcomputingpowerwas thatIhavenoideawhenthegrowthwillslowor runningatapproximatelya15percentannual evenifourcurrentunderstandingoftheseissues rate;bythemiddleofthedecade,thepriceofcom- isontarget. putingpowerwasfallingatnearlya30percent annualrate.Asthepricecontinuestodecrease, itseemslikelythatmuchofthisnewpowerwill HISTORICAL ANALYSIS OF beusedtomanageandcatalogknowledgeand FACTORS IN ECONOMIC informationonincreasinglysophisticatedcom- GROWTH AND PRODUCTIVITY puternetworks.(Theseadvancesmighteven reducetheflowofpaperacrossmydesk!). I’llconcludemyremarksbyattemptingto Inexpensiveandpowerfulcomputersalready placetheeventsofthepastdecadeinthecontext arepermittingthedesignandimplementationof ofinternationaleconomichistory.Althoughdata knowledge-anddocument-managementsystems areincomplete,itseemsunlikelythatinthepast atindividual-departmentlevels,aluxurythat anytechnologyhasexperiencedpricedecreases wouldhavebeendifficulttoaffordonlyafew ofthescalewehaverecentlyexperiencedforICT yearsago.Morepowerfulcomputersalsowill equipmentandsoftware.Electricityspreadfairly continuetoimprovecommunications,permitting rapidlyintobothhomesandfactoriesduringthe fasterandmoreprecisetransmissionoflarge twodecadesafterEdisonandWestinghouse amountsofinformationoverlongdistances.The agreedonindustrystandardsduringthelate lowercostofhigh-speedinternationaldatalinks 1890s.But,followingtheintroductionofthese alreadyispermittingmajormulti-nationalcor- standards,thecostofelectricalequipmentand porationstobettershareinformationaroundthe appliancesdidn’tdecreasesharplyrelativeto worldinrealtime,andperhapshascontributed othergoodsorwagerates,duringthefirstquarter tosomeofthemega-mergersofrecentyears.At ofthetwentiethcentury. thesametime,thelowerpriceofICTequipment Theworldinthepasthasexperiencedsharp likelyhasloweredthecostsofstartingandoper- fluctuationsinproductivitygrowthandlikelywill atingasmallbusiness.Accountingsoftwarecan again.Thehistoricalrecordsuggests,however, replaceanaccountant;awordprocessingprogram thatsustainingmorethana2percentannual canreplaceatypist;webpagescanreplacea growthrateoflaborproductivityforanextended printedcatalog;ande-mailcanreplaceatelephone periodisunlikely.Economichistorianstellus receptionist. thattheworldenteredanew“capitalist”erain 5 ECONOMICGROWTH about1820.Beforethen,forcenturies,realoutput about2percentannualgrowth,astheUnited perworkerhadincreasedverylittle.Sincethen, Stateswaspullingahead,technologically,of therehasbeenafairlysteadyincreaseinthe GreatBritain.Perhapssurprisingly,theslow1 amountofphysicalcapitalperlaborhour,and percentproductivitygrowthduring1973to1992 worldwideoutput(GDP)perpersonemployed stillranksthaterainthirdplace. hasincreasedmorethaneightfold.Historians Inthebestofallworlds,wecanonlyhope agreethatGreatBritainwasthetechnological thattherecent3percentannualgrowthinlabor leaderuptoabout1890;theyalsoagreethatlabor productivitycontinues.FortheUnitedStates, productivitygrewatonlyabouta1.4percent thelong-runtrendoflaborproductivitygrowth annualrateduringthatperiod. seemstobeapproximately2percent.Beforethe About1890,theUnitedStatestookthemantle GoldenAgeof1950to1973,productivitygrew of“technologicalleader”awayfromBritain.Ata atabouta2¼percentannualratebetween1890 conferenceofeducators,itseemsappropriateto and1929andaboutaof1percentratebetween notethathistoriansgivemuchofthecredittothe 1929and1938.Evena2percenttrendwouldbe U.S.highereducationsystem.TheMorrillActof superiortotheeconomy’sperformanceduring 1862,whichcreatedlandgrantuniversities,stim- the1970sand1980s. ulatedteachingandresearchinbothagriculture Animportantbottomlineformeasapolicy- andengineering.Inengineering,withinadecade makeristhatthestateoftheeconomicscienceof afterpassageoftheMorrillAct,thenumberof productivitygrowthcontainsmanyhugegaps. engineeringschoolswentfrom6to70,andthen Thestateofknowledgedoesnotjustifyfirmcon- to126by1917.U.S.engineeringschoolsgraduated victionsaboutanyproductivitygrowthforecast, 100studentsin1870;by1917,thenumberwas althougharangeof3to4percentoverthenext 4,300.Asearlyas1890,theratioofuniversity fewyearsdoesseemsensibletome. studentsper1,000primaryschoolstudentsin Givenourincompleteknowledge,itisimpor- theUnitedStateswastwotothreetimesthatof tantthatwenotlockourselvesintoamonetary anyothercountry.Inagriculture,aslateas1914, policythatdependsonanyparticularrateof theUnitedStateswaswellbehindEuropein productivitygrowth.Itiscertainlyquitepossible scientificagriculture—agenerationlater,the thattoday’sproductivitygrowthwillbemain- UnitedStateswastheworldleader. tainedforthenextdecade,orrisefurther.Bythe Since1890,U.S.productivitygrowthhasnot sametoken,itisobviouslydangeroustosimply beensmooth.Productivitygrewmostrapidly assumethatourgoodtimeswillrollonforthe during1950to1973,whenmuchoftheworldwas foreseeablefuture.Itisnotverysatisfyingfora catchingup,technologically,totheUnitedStates. formeracademictosaythatwe’regoingtohave SomeoftheU.S.growthduringthisperiodmay towatchcarefully,andthatsuchwatchingis havereflectedarecoveryprocessafterthedisrup- aboutthebestadvicewecantake.Butthatdoes tionsoftheGreatDepressionandWorldWarII. seemtometobeoursituation,likeitornot. Thesecondbestperiodwas1870to1913with 6

William Poole (2000, April 6). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20000407_poole

@misc{wtfs_speech_20000407_poole,
  author = {William Poole},
  title = {Speech},
  year = {2000},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20000407_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}