Is the information technology revolution over?
Byrne, David M. ; Oliner, Stephen D. ; Sichel, Daniel E. 等
THE RATE OF INCREASE IN labour productivity in the United
States--an essential element determining improvements in living
standards --slowed in the mid-2000s, as highlighted by Fernald (2012),
Gordon (2012), Jorgenson (2012), and Kahn and Rich (2013), among others.
If this development persists, the long-run outlook for economic growth,
and for improvements in living standards, will have darkened.
Accordingly, it is important to identify the source of the slowdown and
assess the implications for future growth.
One possible explanation of the slower pace of productivity growth
is that the economy has taken a long time to recover from the financial
crisis and Great Recession, as the repair of balance sheets has
proceeded slowly and as uncertainty about the strength of the recovery
has held back investment. (2) Although the slowdown in labour
productivity growth started before the onset of the financial crisis,
those developments could, nonetheless, be contributing to the continued
tepid advance. Another possibility--advocated most prominently by Cowen
(2011) --is that the U.S. economy has entered a long period of
stagnation as the easy innovations largely have been exploited already.
Gordon (2012 and 2013) has offered a third take on the slowdown, related
to Cowen's. Namely, Gordon argues that the information technology
revolution has mostly run its course and that the boost to productivity
growth in the mid-1990s from those developments lasted only about a
decade. (3) Brynjolfsson and McAfee (2011) and others have made the
opposite argument, that the information technology (IT) revolution still
has a long way to run and will continue to dramatically transform the
U.S. economy. (4) Taking a middle ground, Baily, Manyika, and Gupta
(2013) argue that technology (in IT or other fields) is not stagnating
but that the future path of productivity is very uncertain. The question
raised by this debate is the central focus of this article: is the IT
revolution in the United States over? (5)
Obviously, this question is difficult to answer. The structural
transformations and economic benefits spawned by continuing advances in
IT are challenging to track and quantify. For example, what will be the
economic consequences of massively greater connectivity with handheld
and other devices and ready access to huge amounts of information, of
3-D printing and other dramatic changes in manufacturing processes, and
of the changes brought on by companies like Google, Apple, Facebook, and
Amazon that have rapidly come to dominate market segments that were not
even imagined some years ago? One way to cut through this complexity is
to concentrate on a central theme in these developments --the ability to
harness ever-greater computing power that comes in progressively smaller
and less expensive packages. That focus on the capital that lies behind
the IT revolution drives the analysis in this article. Our analysis is
by no means definitive, but we believe it provides a useful contribution
to the debate over whether the IT revolution is over.
Our evidence comes in three parts. First, we use the growth
accounting framework developed by Oliner and Sichel (2002) and Oliner,
Sichel, and Stiroh (2007) to assess the contribution of IT to growth in
labour productivity. This methodology is well suited to the task because
it focuses on the contribution of IT to labour productivity growth from
both the use of IT and from efficiency gains in the production of IT and
because it can be updated with the most recent data to provide estimates
through 2012. Our growth accounting evidence indicates that the
contribution of IT to labour productivity growth in the United States
from 2004 to 2012 stepped down to roughly its contribution from the
mid-1970s to 1995. This evidence supports the view that the contribution
from IT is no longer providing the boost to growth in labour
productivity that it did during the years of the productivity resurgence from 1995 to 2004. Nonetheless, the IT contribution remains substantial,
accounting for more than a third of labour productivity growth since
2004.
Those results indicate where the economy has been. For the second
part of our answer, we use the steady state of our multi-sector growth
model to assess the outlook for growth in labour productivity. This part
of the article allows us to translate alternative assumptions about the
pace of technological progress in the IT sector and the rest of the
economy into an overall growth rate of labour productivity. We find that
a plausible assessment of these underlying trends points to labour
productivity growth for the non-farm business sector of 1.8 per cent
annually. This projection is about the same as the average forecast of
other productivity analysts.
Our baseline projection represents a modest pickup from the
sluggish pace of labour productivity growth experienced since 2004. The
pickup reflects ongoing advances in IT and an assumption that those
gains and innovations in other sectors spur some improvement in
multifactor productivity (MFP) growth outside of the IT sector relative
to its tepid pace from 2004 to 2012. (6) These developments feed through
the economy to provide a modest boost to labour productivity growth.
That said, our projection of growth in labour productivity falls short
of the long-run average rate of 2 1/4 per cent that has prevailed since
1889 and suggests neither a return to rapid growth nor economic
stagnation but rather a period of moderate gains. (7)
Given the ongoing advance in semiconductor technology described
below, along with the uneven pattern of productivity growth during
earlier epochs of innovation, we also consider an alternative scenario
in which a somewhat faster pace of improvement in IT spurs more rapid
innovation throughout the economy. (8) With plausible assumptions, this
alternative scenario generates labour productivity growth of about 2V2
per cent, above the long-run historical average.
Finally, we reassess the pace of advance of semiconductor
technology. (9) We believe that these developments are an essential
consideration, because exceptionally rapid improvements in semiconductor
technology--making computing power faster, smaller, and cheaper--have
been a key ingredient of the IT revolution. On this front, the official
price indexes for semiconductors developed by the Bureau of Labor
Statistics (BLS) show that quality-adjusted semiconductor prices are not
falling nearly as rapidly as they did prior to the mid-2000s. This
development implies, all else equal, that the pace of technical progress
in the semiconductor industry has slowed, a narrative that would comport well with Gordon's view that the IT revolution in the United States
largely is over. However, our reassessment indicates that technical
progress in the semiconductor industry has continued to proceed at a
rapid pace. We also provide preliminary results from a separate research
project that suggest the BLS price series may have substantially
understated the decline in semiconductor prices in recent years.
Our three types of analysis, taken together, provide some useful
insights into the question of whether the IT revolution is over. While
the growth accounting evidence through 2012 confirms Gordon's view
that the contribution from IT has fallen since 2004, the results from
our steady-state analysis and our evidence on semiconductor prices point
in a more optimistic direction. To answer the question posed in the
title of the paper: "No, we do not believe the IT revolution is
over." While our baseline projection anticipates a period of
slightly sub-par gains for labour productivity, we see a reasonable
prospect that the pace of labour productivity growth could rise back up
to its long-run average of 2 1/4 per cent or even move higher.
Growth Accounting: Analytical Framework, Data, and Results
This section assesses the contributions to the increase in labour
productivity from 1974 to 2012 through the lens of a growth accounting
model designed to focus on the use and production of IT capital.
Analytical Framework
Here we provide a brief overview of the growth accounting
framework. Additional detail can be found in Oliner, Sichel, and Stiroh
(2007), henceforth OSS, and the appendix to that article.
The model that underlies our analysis differs from that in OSS only
with regard to the treatment of intangible capital. Here, we use the
measure of non-farm business output in the National Income and Product
Accounts (NIPAs), which excludes most types of intangible capital other
than software. In contrast, OSS incorporated a broader set of intangible
assets to explore the role of intangibles in driving productivity
growth. Although that analysis yielded useful insights about the sources
of growth, the standard output measure used here lines up with the
official data for the United States.
The growth accounting model divides non-farm business into four
sectors that produce final output: computer hardware, software,
communication equipment, and a large non-IT-producing sector. We also
include a sector that produces semiconductors, which are either consumed
as intermediate input by the domestic final-output sectors or exported.
Every sector is assumed to have constant returns to scale, and we assume
the economy is perfectly competitive. In addition, as discussed in OSS,
we allow for cyclical variation in the utilization of capital and labour
and for adjustment costs that reduce market output when firms install
new capital. The treatment of both adjustment costs and cyclical
utilization follows that in Basu, Fernald, and Shapiro (2001).
The appendix to OSS shows that this model generates a standard
decomposition of growth in output per hour:
(1) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]
where the dots signify growth rates; Y is non-farm business output;
H is aggregate hours worked; [K.sub.j] is capital input of type j (where
j = computer hardware, software, communication equipment, and an
aggregate of all other tangible capital); [[alpha].sup.L] and
[[alpha].sup.K.sub.j] are, respectively, the income shares for labour
and each type of capital; q measures labour composition effects that
create a wedge between aggregate labour input and hours worked; and MFP
denotes multifactor productivity. Equation 1 expresses the growth in
labour productivity as the sum of the contributions from capital
deepening, compositional changes in labour input, and multifactor
productivity. (10)
The other key result from the model is an expression for the
decomposition of aggregate MFP growth into sectoral contributions:
(2) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]
where i indexes the final-output sectors (computer hardware,
software, communication equipment, and all other non-farm business); S
denotes the semiconductor sector; and each [mu] represents gross output
in that sector divided by aggregate value added, both in current
dollars. Thus, aggregate MFP growth equals a share-weighted sum of the
sectoral MFP growth rates.
We estimate these sectoral growth rates with the "dual"
method that employs data on prices of output and inputs, rather than
data on quantities. Because the necessary price data are available much
sooner than the corresponding quantity data, the dual method allows us
to calculate more timely estimates of sectoral MFP growth.
Data
For the most part, the data sources track those used in OSS and
Oliner and Sichel (2000, 2002), which relied heavily on data from the
BLS and the NIPAs. That said, we have made some changes to our data
sources. We highlight briefly a few key changes here, with details on
our data sources provided in an appendix available online. (11)
For our capital deepening estimates, we are now working from a
higher level of aggregation than in our earlier research. Previously, we
built up estimates of capital deepening from data on 63 different types
of assets, including detail on different types of hardware and software.
Now, for the period from 1987 to 2010 for which the BLS provides
extensive data, we are starting directly with BLS estimates for
hardware, software, and communication equipment; that is, we are using
the BLS aggregation within these categories rather than doing our own
aggregation. Similarly, we are relying directly on BLS data for
estimates of overall capital deepening. For 2011 and 2012 we extend the
BLS data using NIPA data at this higher level of aggregation. Before
1987, the BLS does not provide the necessary detail for IT capital on
its website, and we splice in estimates from the data constructed in
OSS.
For the decomposition of MFP growth into sectoral contributions, we
now use different price indexes for the output of the communications
sector and the semiconductor sector. For the communications sector, we
use the price index developed by Byrne and Corrado (2007), which falls
more rapidly than does the NIPA price index for communication equipment.
For semiconductor prices, we use the new index developed for the Federal
Reserve's Industrial Production data. (12) The Fed's series
incorporates a new hedonic index for microprocessors (MPUs) since 2006
that falls more rapidly than the current BLS price index.
Results
Table 1 summarizes our growth accounting results, both for the
decomposition of labour productivity growth into capital deepening and
aggregate MFP (to highlight IT use) and for the decomposition of MFP
growth by sector (to highlight efficiency gains in IT production).
[GRAPHIC 1 OMITTED]
As can be seen from the first three columns, labour productivity
growth from 2004 to 2012 ran at just above an annual rate of 1/2 per
cent, down considerably from the elevated pace of the 1995-2004 period
and in line with the disappointing average rate that prevailed over the
prior two decades. The sources of labour productivity growth follow a
similar pattern, with both the contribution of overall capital deepening
and MFP growth falling off over 2004-2012 to about the pace observed
from 1974 to 1995.
The memo item in the table shows the combined contribution to
labour productivity growth from the use and production of IT. That
contribution was 0.64 percentage point from 2004 to 2012, down
significantly from its value from 1995 to 2004 and even a little below
its contribution from 1974 to 1995. Nonetheless, the contribution of IT
to labour productivity growth remains sizable, accounting for more than
one-third of the growth in labour productivity from 2004 to 2012. The
substantial contribution of IT is notable given that the share of total
income accruing to IT capital remains small and that the IT-producing
sector has never accounted for as much as 7 per cent of current-dollar
output in non-farm business (Chart 1).
As for the separate contributions from the use of IT (capital
deepening) and from efficiency gains in the production of IT, the
patterns are similar, with the contributions over 2004-2012 well off
from the rapid pace during 1995-2004 and just a little below the
contribution from 1974 to 1995. The slowdown in the contribution from
the production of IT reflects both a slower pace of advance of MFP in
each IT sector and a sizable step-down in the current-dollar output
share of the industries producing computer hardware, communication
equipment, and semiconductors. This drop reflects substantial movement
of IT manufacturing from the United States to foreign locations. Indeed,
as shown in Chart 1, the share of current-dollar non-farm business
output represented by the production of computer hardware, communication
equipment, and semiconductors has fallen more than 70 per cent from its
peak in 2000. (13) In contrast, the output share of the software
industry was higher from 2004 to 2012 than in either of the earlier
periods.
These estimates reinforce Gordon's story that the contribution
of the IT revolution has been disappointing since the mid-2000s. That
said, sorting out the implications of these results for the future role
of IT in the U.S. economy is difficult. One possibility is that the IT
revolution largely has run its course and will provide much less of a
lasting imprint on living standards than did the earlier epochs of
innovation. Another possibility is that the boost to labour productivity
growth is taking a pause during the transition from the personal
computer (PC) era to the post-PC era. Just as a long lag transpired from
the development of the PC in the early 1980s to the subsequent pickup in
labour productivity growth, there could be a lagged payoff from the
development and diffusion of extensive connectivity, handheld devices,
and ever-greater and cheaper computing power.
In 1987, Robert Solow (Solow, 1987:36) famously said "You see
the computer revolution everywhere except in the productivity
data." As highlighted by Oliner and Sichel (1994), computers
comprised too small a share of the capital stock in 1987 to have made a
large contribution to overall productivity growth. But, several years
later, the imprint of the revolution became very evident. In a parallel
vein, one could now say: "You see massive connectivity and
ever-cheaper computing power everywhere but in the productivity
data." Subsequently, those contributions could become evident in
aggregate data. That, of course, is just speculation about the future.
The next part of our analysis looks ahead to highlight plausible paths
for labour productivity growth in the years ahead.
Outlook for Productivity Growth
We now turn to the outlook for labour productivity in the United
States. The first part of this section uses the steady state of our
growth accounting model to develop estimates of future growth of labour
productivity. We then compare the steady-state results to the
projections from a variety of other sources.
Steady-state Analysis
We update the steady-state analysis in Oliner and Sichel (2002) and
OSS to incorporate the latest available data. As in that earlier work,
we impose a set of conditions on the growth accounting model to derive
an expression for the growth of labour productivity in the steady state.
These conditions include that (i) real output in each sector grows at a
constant rate (which differs across sectors); (ii) real investment in
each type of capital grows at the same constant rate as the real stock
of that capital; (iii) labour hours grow at the same constant rate in
every sector; (iv) the work week is constant; and (v) the growth
contribution from the change in labour composition is constant.
Under these conditions, the appendix to OSS shows that the
steady-state growth of aggregate labour productivity can be expressed
as:
(3) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]
with
(4) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]
As before, the [[alpha].sup.K.sub.i]'s denote income shares
for each type of capital, [[beta].sup.s.sub.i] is the semiconductor
share of total costs in final-output sector i, q is the change in labour
composition, and the [micro]'s denote current-dollar output shares
in each sector. The expression for aggregate MFP growth in equation 4 is
unchanged from equation 2, the expression that holds outside the steady
state. Although no explicit terms for capital deepening appear in
equation 3, capital deepening is determined endogenously from the
improvement in technology. The terms in brackets capture the growth
contribution from this induced capital deepening. Accordingly, equation
3 shows that steady-state growth in output per hour equals the sum of
growth in MFP, the change in labour composition, and the contribution
from the capital deepening induced by MFP growth. (14)
Steady-state growth in labour productivity depends on a large
number of parameters--about 30 in all after accounting for those that
lie behind the income shares and sectoral MFP growth rates shown in
equations 3 and 4. We consider a range of values for these parameters.
The complete list can be found in Appendix Table A1. Individually, most
of these parameters do not have large effects on the steady-state growth
rate. However, two parameters in equations 3 and 4 are important: the
rate of improvement in labour composition and MFP growth for non-farm
business outside the IT-producing sector ("other non-farm
business"). For labour composition effects, we rely on the latest
projection based on the methodology in Jorgenson, Ho, and Stiroh (2005).
(15) In this projection, changes in labour composition boost labour
productivity growth only 0.07 percentage point per year on average
between 2012 and 2022, as educational attainment is anticipated to reach
a plateau. To allow for uncertainty around this projection, we specify a
range that runs from 0 to 0.14 percentage point. For MFP growth in other
non-farm business, we use values that range from 0.06 to 0.62 per cent
per year. The lower bound equals the average growth rate from 2004 to
2012, while the upper bound equals two-thirds of the much faster pace
registered from 1996 to 2004, which would be a notable improvement over
the recent performance. (16)
Using equations 3 and 4, we find that steady-state growth in labour
productivity ranges from an annual rate of 0.88 per cent (when each
parameter is set to its lower-bound value) to 2.82 per cent (using the
upper-bound values). The wide range reflects the uncertainty about the
future values of the underlying parameters. To obtain a baseline
steady-state estimate, we set each parameter to the midpoint of its
range. The resulting estimate of 1.80 per cent, shown in Table 2, is
about 1/4 percentage point above the relatively small gains recorded on
average since 2004. The contributions from capital deepening and MFP
move up notably from the 2004-2012 pace, but these larger contributions
are offset in part by the reduced contribution from labour composition.
(17)
Table 2 also presents an alternative scenario that embeds a
somewhat more optimistic view about the outlook for information
technology. In this alternative scenario, we allow for faster MFP growth
in the IT-producing sectors by setting the rate of decline in output
prices in each component industry to its upper-bound value. With this
change, semiconductor prices fall 6 percentage points (at an annual
rate) more quickly than in the baseline, while the speedup in the other
IT sectors ranges from about 1 percentage point (software) to 3 3/4
percentage points (computer hardware). These price changes are not
especially large in the context of the observed variation since 1974
(see Appendix Table A1). We assume that the resulting faster diffusion
of new technology boosts MFP growth in the rest of non-farm business
from the baseline value of 0.34 per cent annually to the upper-bound
value of 0.62 per cent. All other parameters remain at their baseline
values.
With these changes, steady-state growth of labour productivity
rises to 2.47 per cent at an annual rate, almost 3/4 percentage point
above the baseline estimate. The faster assumed MFP growth directly
augments the rate of increase in labour productivity. It also has a
multiplier effect by inducing additional capital deepening. This
scenario illustrates that it would not take a very large increase in the
impetus from IT to raise labour productivity growth back to the
neighborhood of its long-term historical average of 2 1/4 per cent or
above.
Other Estimates
Table 3 compares our steady-state results to the projections of
future growth in labour productivity from other analysts. The table
displays the most recent projections from each source, along with the
earlier projections that were presented in OSS. (18) As shown, the
earlier projections ranged from 2.0 per cent to 2.5 per cent at an
annual rate, with an average of 2.3 per cent--the same as the midpoint
of the steady-state range in OSS. These earlier projections all have
been revised down, some quite substantially. The average markdown from
2.3 per cent to 1.9 per cent virtually matches the downward revision in
our steady-state estimate. Thus, compared with projections from six
years ago, the average projected growth of labour productivity has moved
down from about the long-run historical average to a pace somewhat below
that average.
We would stress that the similarity among these projections belies
the high degree of uncertainty about future productivity growth. The
range of estimates from our steady-state framework hints at this
uncertainty. The low end of the range (less than 1 per cent) represents
a dismal rate of productivity growth from a historical perspective,
while the top end (about 2.8 per cent) is well above the historical
average. The only projection in the table with a statistically-based
confidence range is that from Kahn and Rich (2013).
In their regime-switching model, the 75 per cent confidence band
for productivity growth five years ahead runs from slightly below zero
to about 4 per cent. Suffice it to say, productivity growth is extremely
hard to predict. Almost all analysts have failed to anticipate the major
shifts in growth over the past several decades, and we should not expect
better going forward.
Trends in Semiconductor Technology
The contribution of information technology to economic growth
depends importantly on the improvements in the semiconductor chips
embedded in IT capital goods and on prices of those chips. This section
presents the latest available information on technological progress in
the semiconductor industry and on chip prices.
Technology Cycles
As discussed in Aizcorbe, Oliner, and Sichel (2008), there is a
broad consensus that the pace of technical advance in the semiconductor
industry sped up in the mid-1990s, a development first brought to the
attention of economists by Jorgenson (2001). The standard definition of
a semiconductor technology cycle is the amount of time required to
achieve a 30 per cent reduction in the width of the smallest feature on
a chip. Because chips are rectangular, a 30 per cent reduction in both
the horizontal and vertical directions implies about a 50 per cent
reduction (0.7*0.7) in the area required for the smallest chip
component.
Table 4 presents the history of these scaling reductions for the
semiconductor industry as a whole and microprocessor (MPU) chips
produced by Intel, updating a similar table in Aizcorbe, Oliner, and
Sichel (2008). As shown, the industry has achieved massive reductions in
scaling over time, leaving the width of a chip component in 2012 about
450 times smaller (10,000/22) than in 1969. Throughout this period,
Intel always has been at the industry frontier or within a year of the
frontier. (19)
Given these introduction dates, Table 5 reports the average length
of the technology cycle (as defined above) for various periods. For the
industry as a whole, the technology cycle averaged three years until
1993 and then dropped to about two years from 1993 to 2012. Within the
later period, the scaling advances were especially rapid from 1993 to
2003 and a bit slower after 2003. Even so, the average cycle since 2003
has remained substantially shorter than the three-year cycle in effect
before the 1990s. For Intel's MPU chips, there has been no pullback
at all from the two-year cycle. The upshot is that the cycles in
semiconductor technology --a key driver of quality improvement in IT
products--have remained rapid.
While the pace of miniaturization has been sustained, semiconductor
producers have changed the approach used to translate these engineering
gains into faster performance. Historically, each new generation of
technology in semiconductors has allowed for an increase in the number
of basic calculations performed per second for a given chip design.
However, as speed continued to increase, dissipating the generated heat
became problematic. In response, Intel shifted in 2006 toward raising
"clock-speed" more slowly and boosted performance instead by
placing multiple copies of the core architecture on each chip--a change
enabled by smaller feature size--and by improving the design of those
cores (Shenoy and Daniel, 2006).
The effect of this strategy on the rate of increase in performance
for end users has been a matter of some debate. Pillai (2013) examines
the record and presents evidence that scores for Intel MPUs on benchmark
performance tests--based on standard tasks designed to reflect the needs
of computer users--rose more slowly from 2001 to 2008 than in the 1990s.
Our own examination of more recent data suggests the slower rate of
performance improvement has persisted through 2012. Nonetheless, even on
this slower trend, our results show that the end user performance of
Intel's MPU chips improved roughly 30 per cent per year on average
from 2001 to 2012. End users have continued to see substantial gains in
performance, just not the extraordinary rate of increase recorded in the
1990s.
[GRAPHIC 2 OMITTED]
Prices for MPUs
Advances in semiconductor technology have driven down the
constant-quality prices of MPUs and other chips at a rapid rate over the
past several decades. (20) These declines, in turn, have lowered the
prices of computer hardware, communication equipment, and other goods in
which the chips are embedded, spurring the diffusion of IT capital goods
throughout the economy. Thus, semiconductor prices play a central role
in our assessment of whether the IT revolution still has legs.
On this score, the recent data on MPU prices, as measured by the
producer price index (PPI), are not encouraging. As shown by the solid
line in Chart 2, from the late 1990s--when the BLS adopted the current
PPI methodology--to 2007, MPU prices fell at an average annual rate of
about 50 per cent. But the rate of decline slowed in each year after
2007, so much so that the price index barely fell at all in 2012. The
PPI data, if correct, would indicate that a fundamentally adverse shift
in semiconductor price trends has taken place over the past several
years.
In a separate in-progress paper, we are developing a new hedonic
price index for MPUs, and some key results from that article are
reported here. We compiled wholesale price lists for Intel MPUs and
matched these prices to benchmark performance scores and other chip
characteristics. (21) We then estimated a hedonic regression back to
2006 using only the list price at the time of introduction. We omitted
the list prices for subsequent periods because in many cases those
prices were not adjusted down when a more powerful, closely-related chip
entered the market, contrary to the pattern in earlier years. The
absence of price adjustment raises concern that existing chips are being
sold at a discount relative to the constant list price that widens when
new models are introduced. Thus, to the extent that significant chip
sales are taking place at transaction prices that fall ever further
below the list prices, a standard procedure that relied on those list
prices or other similar prices reported by manufacturers would be
biased. Our hedonic index, which only uses prices at the time of each
new chip's introduction, provides a very rough way of avoiding this
potential bias. This new hedonic index was incorporated into the Federal
Reserve's March 2013 annual revision of its industrial production
indexes. (22)
The key result from this new price index is that MPU prices have
remained on a fairly steep downtrend, in sharp contrast to the picture
painted by the PPI. The dashed line in Chart 2 presents the MPU price
index constructed by Federal Reserve staff from its inception in 1992
through 2011, the final year that incorporates the new hedonic results.
The Fed index of MPU prices fell at an average annual rate of 36 per
cent from 2006 to 2011, somewhat less than that observed during the
period of extraordinary productivity gains in the late 1990s, but
substantially greater than the drop in the PPI in recent years.
Moreover, unlike the PPI, the Fed's index provides no sign of a
trend toward slower price declines over the past several years. All in
all, the Fed's MPU price index lines up reasonably well with the
MPU performance data described above--both series have reverted to
historically normal rates of change after a period of unusually rapid
performance gains and price declines.
Other IT-Related Measurement Issues
Beginning in the 1970s, many studies of semiconductors, computers,
communication equipment, and software have concluded that
quality-adjusted IT prices have fallen at remarkable rates, and indexes
capturing these price declines have been incorporated into the NIPAs in
many cases (Wasshausen and Moulton, 2006). However, despite this
considerable progress on measuring IT prices, some important measurement
challenges remain to be addressed. Here, we list three rather different
areas that, in our view, would benefit from additional research.
First, investment in software is the largest component of IT
investment, and quality adjustment has proven difficult for this
category. While the BEA has closely studied software prices, this area
has proved a tough nut to crack, and the agency is still using proxies
for the prices of a significant fraction of software. With these
proxies, the BEA's prices for own-account and custom software have
increased in recent years. For prepackaged software, Copeland (2013)
finds sizable declines in quality adjusted prices using scanner data.
(23) Those declines are faster than those in the PPI for prepackaged
software and contrast sharply with the price increases for custom and
own-account software, suggesting that further work on software prices
would be valuable.
Second, even if well-constructed price indexes for all IT equipment
and software were available, the impact of the IT revolution may be
understated for a very different reason. It has become common for U.S.
manufacturing firms to outsource fabrication of electronics, frequently
to offshore locations, but to retain the design and management tasks
within the company, often in domestic locations. Because these so-called
"factoryless manufacturers" may create the intellectual
property and bear the entrepreneurial risk for products with rapidly
increasing quality, the real value-added of these establishments
arguably should reflect the innovation embodied in the product. Because
in practice this activity is often classified within wholesale trade,
the resulting output is not counted as part of the IT sector of the
economy. Early studies of companies using the factoryless business model
indicate this may be an appreciable share of economic activity (Bayard,
Byrne, and Smith, 2013, and Doherty, 2013).
Finally, IT as defined in this article does not encompass all
products with significant electronic content. We expect the prices for a
broad array of electronic equipment would reflect the price declines for
their semiconductor inputs, including navigation equipment,
electromedical equipment, and a variety of types of industrial process
equipment. (24) In fact, the PPIs for the output of these industries
increase in most cases, again raising an important question for price
analysts to investigate. (25)
These three rather different concerns all point to the possibility
that the full impact of the IT revolution has not yet been recorded.
Conclusion
Is the information technology revolution over? In light of the
slower pace of productivity gains since the mid-2000s, Robert Gordon has
argued that the boost to productivity growth from adoption of IT largely
had run its course by that point. Erik Brynjolfsson and others make the
opposite case, arguing that dramatic transformations related to IT
continue and will leave a significant imprint on economic activity. We
bring three types of evidence to this debate, focusing on the IT capital
that underlies IT-related innovations in the economy.
What does this evidence show? Our analysis indicates that the
contributions of IT to labour productivity growth from 2004 to 2012 look
much as they did before 1995, supporting Gordon's side of the
argument. Our baseline projection of the trend in labour productivity
points to moderate growth, better than the average pace from 2004 to
2012, but still noticeably below the very long-run average rate of
labour productivity growth. On the more optimistic side, we present
evidence that innovation for semiconductors is continuing at a rapid
pace, raising the possibility of a second wave in the IT revolution, and
we see a reasonable prospect that the pace of labour productivity growth
could rise to its long-run average of 2 1/4 per cent or even above.
Accordingly, with all the humility that must attend any projection of
labour productivity, our answer to the title question of the paper is:
No, the information technology revolution is not over.
Appendix Table A1. Parameter Values for Steady-State Calculations
Historical Averages
1974-1995 1996-2004 2005-2012
Output shares (1) ([mu])
1. Computer hardware 1.11 1.12 0.44
2. Software 1.02 2.60 3.17
3. Communication equipment 0.85 1.08 0.47
4. Other final-output sectors 97.05 95.20 95.84
5. Net exports of semiconductors -0.04 -0.01 0.08
6. Total semiconductor output 0.39 0.80 0.52
Semiconductor cost shares (1) ([beta])
7. Computer hardware 14.79 22.23 22.31
8. Software 0.00 0.00 0.00
9. Communication equipment 6.00 17.29 18.88
10. Other final-output sectors 0.21 0.38 0.26
Relative inflation rates (2) ([pi])
11. Semiconductors -26.25 -43.29 -26.28
12. Computer hardware -19.11 -22.58 -14.72
13. Software -5.57 -2.81 -2.43
14. Communication equipment -6.89 -13.31 -8.55
Depreciation rates (3) ([delta])
15. Computer hardware 23.95 28.80 31.38
16. Software 31.58 34.44 37.75
17. Communication equipment 11.76 11.20 11.79
18. Other business fixed capital 5.69 5.76 5.38
Expected capital gains/losses (4) ([PI])
19. Computer hardware -15.69 -15.74 -9.61
20. Software 0.35 -0.41 -0.26
21. Communication equipment 2.45 -3.44 -3.73
22. Other business fixed capital 5.74 3.10 2.69
Capital-output ratios ([Tp.sub.K]K /pY)
23. Computer hardware 0.020 0.030 0.024
24. Software 0.026 0.068 0.084
25. Communication equipment 0.072 0.081 0.070
26. Other business fixed capital 2.32 1.91 2.09
Income shares (1) ([alpha])
27. Computer hardware 0.98 1.50 1.13
28. Software 1.04 2.76 3.75
29. Communication equipment 1.29 1.67 1.54
30. Other business fixed capital 19.91 16.53 19.38
31. Other capital (5) 8.85 7.53 8.11
32. labour 67.93 70.01 66.09
Other parameters
33. Growth of "other" sector MFP3 0.14 0.94 0.06
34. Change in labour composition 0.26 0.22 0.34
(3) (q)
35. Nominal return on capital (3) 8.62 5.99 6.58
(R)
36. Ratio of domestic 0.93 1.01 1.20
semiconductor output to domestic
use (1 + [theta])
Steady-State
Method for
Lower Upper Setting
Bound Bound Bounds
Output shares (1) ([mu])
1. Computer hardware 0.15 0.50 A
2. Software 3.00 3.50 A
3. Communication equipment 0.25 0.60 A
4. Other final-output sectors 96.52 95.32 B
5. Net exports of semiconductors 0.08 0.08 C
6. Total semiconductor output 0.40 0.65 A
Semiconductor cost shares (1) ([beta])
7. Computer hardware 15.00 20.00 A
8. Software 0.00 0.00 C
9. Communication equipment 14.00 20.00 A
10. Other final-output sectors 0.29 0.34 B
Relative inflation rates (2) ([pi])
11. Semiconductors -24.23 -36.35 D
12. Computer hardware -15.21 -22.81 D
13. Software -3.40 -5.11 D
14. Communication equipment -7.01 -10.51 D
Depreciation rates (3) ([delta])
15. Computer hardware 31.38 31.38 C
16. Software 37.75 37.75 C
17. Communication equipment 11.79 11.79 C
18. Other business fixed capital 5.38 5.38 C
Expected capital gains/losses (4) ([PI])
19. Computer hardware -10.28 -15.42 E
20. Software -0.27 -0.40 E
21. Communication equipment -2.86 -4.29 E
22. Other business fixed capital 2.33 3.49 E
Capital-output ratios ([Tp.sub.K]K /pY)
23. Computer hardware 0.020 0.029 A
24. Software 0.082 0.092 A
25. Communication equipment 0.060 0.075 A
26. Other business fixed capital 1.90 2.30 A
Income shares (1) ([alpha])
27. Computer hardware .96 1.55 B
28. Software 3.66 4.12 B
29. Communication equipment 1.27 1.70 B
30. Other business fixed capital 18.29 19.47 B
31. Other capital (5) 8.11 8.11 C
32. labour 67.11 65.07 B
Other parameters
33. Growth of "other" sector MFP3 0.06 0.62 F
34. Change in labour composition 0.00 0.14 G
(3) (q)
35. Nominal return on capital (3) 6.58 6.58 C
(R)
36. Ratio of domestic 1.20 1.20 C
semiconductor output to domestic
use (1 + [theta])
(1.) Current-dollar shares, in per cent.
(2.) Output price inflation in each sector minus that in the "other
final-output" sector, in percentage points.
(3.) In per cent.
(4.) Three-year moving average of price inflation for each asset, in
per cent.
(5.) Includes land, inventories, and tenant-occupied housing.
Key: Methods for setting steady-state bounds.
A. Range around recent values.
B. Implied by other series.
C. Average value over 2005-2012.
D. The lower and upper bounds equal, respectively, 0.8 and 1.2 times
the average rate of change over 1974-2012.
E. The lower and upper bounds equal, respectively, 0.8 and 1.2 times
the average rate of change over 1996-2012.
F. The lower bound equals the average rate of MFP growth in this
sector over 2005-12; the upper bound equals 2/3 times the average
rate over 1996-2004.
G. Based on a forecast obtained from Dale Jorgenson for 2012-22
(private correspondence, December 19, 2012). Jorgenson's forecast
is a point estimate of 0.07 per cent annually. We set symmetric
bounds around this point forecast.
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David M. Byrne
Federal Reserve Board
Stephen D. Oliner
American Enterprise Institute and UCLA
Daniel E. Sichel (1)
Wellesley College
(1) David M. Byrne is a Senior Economist at the Federal Reserve
Board. Stephen D. Oliner is a Resident Scholar at the American
Enterprise Institute and a Senior Fellow at the UCLA Ziman Center for
Real Estate. Daniel E. Sichel is Professor of Economics at Wellesley
College. We thank Andrew Sharpe and Chad Syverson for helpful comments
and Sophie (Liyang) Sun for exceptional research assistance. We also
thank Robert Gordon, Dale Jorgenson, and Dan Hutcheson for providing
data and forecasts. The views expressed here are ours alone and should
not be attributed to the Board of Governors of the Federal Reserve
System, its staff, or any of the other institutions with which we are
affiliated. Emails: david.m.byrne@frb.gov, stephen.oliner@aei.org,
dsichel@wellesley.edu.
(2) Reinhart and Rogoff (2009) documented the typical pattern of
slow recovery from financial crises. See Fernald (2012) for a discussion
of the performance of productivity before, during, and after the Great
Recession.
(3) A large literature has examined these issues in the past. For
our contribution to this literature and for citations to the earlier
literature, see Oliner and Sichel (2000, 2002) and Oliner, Sichel, and
Stiroh (2007). An interesting recent paper is Feenstra, Mandel,
Reinsdorf, and Slaughter (2013), which presents evidence that about
one-eighth of the pickup in labour productivity growth in the United
States (and one-fifth of the pickup in multifactor productivity growth)
after 1995 reflected mismeasurement in the terms of trade.
(4) We use the term IT to refer to the collection of technologies
related to computer hardware, software, and communication equipment.
Other authors have used the term ICT (referring to information and
communication technologies). We regard the two terms as synonymous.
Although the IT capital considered in this article encompasses a wide
range of assets, it excludes intangible capital other than software. For
research that takes intangible capital into account, see Corrado,
Hulten, and Sichel (2009), Corrado and Hulten (2012), Corrado, Haskel,
Jona-Lasinio, and Iommi (2012), and Oliner, Sichel, and Stiroh (2007).
(5) For more on Brynjolfsson's and Gordon's perspectives,
see their debate on TED (Technology, Entertainment, Design) on February
26, 2013. Available at http://conferences.ted.com/TED2013/program/
guide.php.
(6) See Baily, Manyika, and Gupta (2013) for a discussion of
ongoing innovation in different sectors of the economy.
(7) To calculate this long historical average, we used data on
output and hours from Kendrick (1961) for 1889-1929 and from the Bureau
of Economic Analysis (output) and Kendrick (hours) for 1929-47. Gordon
(2010: 25) provides details about the sources of these data series. For
1947-2012, we used data from the Bureau of Labor Statistics on output
per hour in the non-farm business sector. The growth rate over each
period is calculated as the average log difference between the initial
and final year of the period.
(8) As Chad Syverson points out in his comments on this article
(Syverson, 2013), electrification generated, after a long lag, a period
of elevated growth in labour productivity that lasted for about a
decade. That pickup was followed by a slowdown, but, subsequently,
productivity growth rates picked up again.
(9) For a discussion of the linkages between the pace of innovation
in semiconductor manufacturing and semiconductor prices, see Aizcorbe,
Oliner, and Sichel (2008) and Flamm (2007).
(10) Equation 1 simplifies one aspect of the expression derived in
OSS. Technically, the weight on the capital deepening term for type j
capital equals its income share minus the elasticity of adjustment costs
with respect to that type of capital. We have suppressed the adjustment
cost elasticity in equation 1. Because empirical estimates of
asset-specific adjustment cost elasticities are not available, OSS
approximated the theoretically correct weights with standard income
shares. We do the same here and simply start from that point in equation
1. The approximation does not affect the total weight summed across the
capital terms, as the theoretically correct weights and the standard
capital income shares both sum to one minus the labour share. But the
approximation could result in some misallocation of the weights across
types of capital.
(11) The Data Appendix can be found at
http://www.csls.ca/ipm/25/appendix-byrne-oliner-sichel.pdf.
(12) This index was incorporated into the Industrial Production
data in March 2013.
(13) As discussed later in the article, these shares likely are
understated because the domestic activity of these firms is mismeasured
to some extent. However, correcting any such mismeasurement would leave
the trends in Chart 1 intact.
(14) In the steady state, cyclical factors and adjustment costs
have no effect on MFP growth. These effects disappear as a consequence
of assuming that the work week is constant and that investment and
capital stock grow at the same rate for each type of capital.
(15) We received this projection from Dale Jorgenson by email on
December 19, 2012.
(16) Although the steady-state projection does not apply to a
specific time period, we think of it as pertaining to the outlook five
to ten years ahead.
(17) This contribution declines not only because of the projection
that educational attainment will plateau, but also because the job
losses during the Great Recession were skewed toward less educated
workers, which shifted the mix of employment over 2004-12 toward more
skilled workers, boosting the labour composition effect over that
period.
(18) With only a few exceptions, these projections refer to the
non-farm business sector as defined by BLS over horizons of ten years or
more. Among the exceptions, Kahn and Rich (2013) employ a five-year
horizon, while there is no explicit projection period in Fernald (2012).
In addition, Fernald's projection refers to the private business
sector, which includes the farm sector.
(19) For the 1,500 nanometer process introduced in the early 1980s,
the data indicate that Intel sold chips based on this technology two
years before the process was used anywhere in the industry, an obvious
inconsistency. Fortunately, this problem has no effect on the average
length of the technology cycles that we present below because the
average length depends only on the frontier technology at the beginning
and end of the period under consideration, and there are no
inconsistencies in these endpoint values.
(20) Chips other than MPUs and memory (including those used in
smartphones) are often produced using a technology behind the frontier.
These chips adopt new technology, albeit with a lag. This process
transmits the price declines at the frontier to a wide range of
different chips.
(21) Although we do not have access to BLS' source data,
comments by BLS staff indicate that published wholesale price lists for
MPUs have been used to supplement the data collected by the PPI survey
(Holdway, 2001). We focus on Intel because of its large share of
domestic MPU production.
(22) For additional information, see the discussion of the revision
at http://www.federalreserve.gov/releases/
g17/revisions/Current/DefaultRev.htm. The price index is available at
http://www.federalreserve.gov/ releases/g17/download.htm.
(23) Also, see Prud'homme, Sanga, and Yu (2005) for similar
evidence using Canadian scanner data.
(24) Even products within the IT category may benefit from a closer
look. For example, Chwelos, Berndt, and Cockburn (2008) develop hedonic
price indexes for personal digital assistants from 1999 to 2004 and find
average price declines ranging from 19 to 26 per cent per year.
(25) A BLS paper by Holdway (2011) on the use of hedonics indicates
that resource constraints have limited the expansion of the use of
hedonic techniques.
Table 1
Contributions to Growth of Labour Productivity in the U.S. Non-Farm
Business Sector (a)
1974-1995 1995-2004 2004-2012
(1) (2) (3)
1. Growth of labour 1.56 3.06 1.56
productivity (b)
Contributions (percentage points per year):
2. Capital deepening 0.74 1.22 0.74
3. IT capital 0.41 0.78 0.36
4. Computer hardware 0.18 0.38 0.12
5. Software 0.16 0.27 0.16
6. Communication equipment 0.07 0.13 0.08
7. Other capital 0.33 0.44 0.38
8. Labour composition 0.26 0.22 0.34
9. Multifactor productivity (MFP) 0.56 1.62 0.48
10. Effect of adjustment costs 0.07 0.07 -0.02
11. Effect of utilization -0.01 -0.06 0.16
12. MFP after adjustments 0.50 1.61 0.34
13. IT-producing sectors 0.36 0.72 0.28
14. Semiconductors 0.09 0.37 0.14
15. Computer hardware 0.17 0.17 0.04
16. Software 0.06 0.10 0.08
17. Communication equipment 0.05 0.07 0.02
18. Other non-farm business 0.13 0.90 0.06
Memo:
19. Total IT contribution (c) 0.77 1.50 0.64
Change Change
between between
1974-1995 1995-2004
and and
1995-2004 2004-2012
(2)-(1) (3)-(2)
1. Growth of labour 1.50 -1.50
productivity (b)
Contributions (percentage points per year):
2. Capital deepening 0.48 -0.48
3. IT capital 0.37 -0.42
4. Computer hardware 0.20 -0.26
5. Software 0.11 -0.11
6. Communication equipment 0.06 -0.05
7. Other capital 0.11 -0.06
8. Labour composition -0.04 0.12
9. Multifactor productivity (MFP) 1.06 -1.14
10. Effect of adjustment costs 0.00 -0.09
11. Effect of utilization -0.05 0.22
12. MFP after adjustments 1.11 -1.27
13. IT-producing sectors 0.36 -0.44
14. Semiconductors 0.28 -0.23
15. Computer hardware 0.00 -0.13
16. Software 0.04 -0.02
17. Communication equipment 0.02 -0.05
18. Other non-farm business 0.77 -0.84
Memo:
19. Total IT contribution (c) 0.73 -0.86
Source: Authors' calculations.
(a.) Detail may not sum to totals due to rounding.
(b.) Measured as 100 times average annual log difference for the
indicated years.
(c.) Sum of lines 3 and 13.
Table 2
Steady-State Growth of Labour Productivity in the U.S. Non-Farm
Business Sector (a)
History Steady State
Source 2004-12 Baseline (b) Alternative (c)
Growth of labour 1.56 1.80 2.47
productivity (per cent per
year)
Contributions (percentage points per year):
Capital deepening 0.74 1.03 1.34
Change in labour 0.34 0.07 0.07
composition
MFP 0.48 0.70 1.06
IT-producing sectors (d) 0.29 0.38 0.46
Other non-farm business 0.05 0.33 0.60
(d, e)
Adjustments (f) 0.14 0.00 0.00
Memo:
MFP growth in other non-farm 0.05 0.34 0.62
Source: Authors' estimates.
(a.) Detail may not sum to totals due to rounding.
(b.) Uses midpoint values for all parameters.
(c.) Uses upper-bound values for decline in IT-sector prices and
upper-bound value for MFP growth in other non-farm business. All
other parameters set to midpoint values.
(d.) After excluding the effects of adjustment costs and cyclical
utilization.
(e.) Equals the product of MFP growth in this sector (shown in the
memo line) and the sector's share of non-farm business output (which
is close to one).
(f.) For effects of adjustment costs and cyclical utilization.
Table 3
Alternative Projections of U.S. Labour Productivity Growth
(per cent per year)
As of
Source 2007 2012-13
1. Baseline steady-state estimate 2.3 1.8
2. Congressional Budget Office 2.3 2.1
3. John Fernald n.a. 1.9
4. Robert Gordon 2.0 1.75
5. James Kahn and Robert Rich 2.5 1.8
6. Survey of Professional Forecasters (a) 2.2 1.8
Average of lines 2 through 6 2.3 1.9
Sources: 2007 estimates from Oliner, Sichel, and Stiroh (2007:Table
12) and 2012-13 estimates from Congressional Budget Office
(2013:Table 2-2); Fernald (2012) "Benchmark Scenario" in Table 2;
Gordon (2010), with adjustment provided in private correspondence;
Kahn-Rich Productivity Model Update (February 2013) posted at
http://www.newyorkfed.org/research/national_economy/
richkahn_prodmod.pdf; Federal Reserve Bank of Philadelphia, Survey of
Professional Forecasters, February 15, 2013, Table 7.
(a.) Median forecast in the survey.
Table 4
Year of Introduction for New
Semiconductor Technology
Process Industry Intel
(nanometers) Frontier MPU Chips
10,000 1969 1971
8,000 1972 n.a.
6,000 n.a. 1974
5,000 1974 n.a.
4,000 1976 n.a.
3,000 1979 1979 (a)
2,000 1982 n.a.
1,500 1984 1982
1,250 1986 n.a.
1,000 1988 1989
800 1990 1991
600 1993 1994
350 1995 1995
250 1997 1997
180 1999 1999
130 2001 2001
90 2003 2004
65 2005 2005
45 2007 2007
32 2010 2010
22 2012 2012
Sources: Industry frontier: VLSI Research Inc. (2006) for
the 65 nanometer and earlier processes and private
correspondence with Dan Hutcheson (November 10,
2012) for the more recent processes. Intel MPU chips:
http://www.intel.com/pressroom/kits/quickreffam.htm.
(a.) Intel began making MPU chips with this process in
1979. We omitted Intel's earlier use of the 3000
nanometer process (starting in 1976) to produce less
complex devices, such as scales.
n.a.: Not available
Table 5
Semiconductor Technology Cycles
(Years needed for 30 per cent reduction in linear scaling)
Industry Frontier
Period Years
1969-1993 3.0
1993-2012 2.1
1993-2003 1.9
2003-2012 2.3
Intel MPU Chips
Period Years
1971-1994 2.9
1994-2012 1.9
1994-2004 1.9
2004-2012 2.0
Source: Authors' calculations from data in table 4.