NCPA - National Center for Policy Analysis

Technology Spurred Productivity Growth

March 12, 2002

The strength of the economic expansion in the second half of 1990s led many to argue that the rapid increases in measured productivity were attributable to bad measurement or to temporary factors. However, researchers who have made new estimates of the role of technological change in creating the unusual increases in measured productivity say that productivity growth may actually have been understated.

  • The share of investment in information technology rose from a baseline of roughly 3 percent of gross domestic product (GDP) in the late 1980s to almost 6 percent by 1999.
  • That unusually rapid rate of investment may have led measured productivity growth to understate the underlying rate of technical change -- because rapid capital investment disrupts firms' ability to produce output; for example, workers often are diverted from their normal tasks to install new equipment and learn to use it effectively.
  • These "adjustment costs" lower output growth, and thus lower measured productivity growth as well.

Controlling for this range of confounding effects, researchers found that the strong productivity growth in the second half of the 1990s was in fact attributable to accelerating technological change, not to poor measurement or to temporary factors.

  • They find that in the first half of the 1990s, true technological productivity grew at an annual rate of 1.2 percent, but rose to 3.1 percent for the 1995 to 1999 period.
  • The rate of technological change exceeded even the measured growth rate of 2.5 percent, because of the temporary damping effect of higher investment on productivity growth noted above.
  • In the aggregate, there is "evidence of a substantial increase in the pace of technological change in the latter half of the 1990s."

Source: Linda Gorman, "Technology and Productivity Growth," NBER Digest, October 2001; based on Susanto Basu, John Fernald, and Matthew Shapiro, "Productivity Growth in the 1990s: Technology, Utilization, or Adjustment," NBER Working Paper No. 8359, July 20001, National Bureau of Economic Research.

For NBER text


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