Productivity Growth and the New Economy

... while new economy industries have demonstrated acceleration of productivity growth in recent years, there has also been a substantial concurrent upturn in such growth in much of the traditional economy.

The information and communications industries are widely acknowledged as having fueled productivity in the United States in recent years. But by applying a new approach to measurement, NBER Research Associate William Nordhaus reports that the same period has also seen a substantial upturn in labor productivity outside of the new economy.

In Productivity Growth and the New Economy (NBER Working Paper No. 8096) Nordhaus relies on traditional data from the Bureau of Economic Analysis and the Bureau of Labor Statistics. In addition, though, he employs a new measure called "well-measured output," which involves only sectors (farming, mining, manufacturing, transportation, utilities, wholesale and retail trade) for which output is measured relatively well. He then considers these factors segregated from new economy growth.

The last three years for which statistics are available (1996-8) were a period of dramatic growth and accordingly provide fertile ground for study. In order to distinguish changes in labor productivity growth as seen in GDP, in the business sector, and in well-measured output, Nordhaus devises a new technique that identifies a pure productivity effect (a fixed weight average of the productivity growth rates of different industries). His results indicate that the pure productivity effect in the three-year period has been considerably higher than total production growth. The business sector for example saw total labor productivity expansion of 3.2 percent per year, while pure productivity growth was 3.6 percent.

Nordhaus further applies a productivity measurement based on the "welfare-theoretic" point of view, which gauges growth in average living standards. This "ideal" measure is higher than more conventional measures of labor productivity growth -- 0.21 percent per year higher over the period 1978-98, but only slightly higher in the most recent period.

From here, Nordhaus finds evidence that runs counter to earlier studies that suggested the computer industries were unique in productivity growth in recent years. For all three output concepts (total GDP, the business sector, and well-measured output), labor productivity without the new economy demonstrated a marked rise during 1996-8 as compared to 1978-98. The acceleration in traditional economic productivity was 0.64 percent for overall GDP, 0.91 percent for business output, and 1.16 percent for well-measured output. The new economy contributed roughly one-half of the total acceleration in labor productivity growth. This is surely a considerable impact, but Nordhaus maintains that even after correcting for capital deepening, productivity has accelerated in all three of the sectors in his study.

Finally, Nordhaus considers how much each industry contributes to the total of productivity growth in the overall economy. Not surprisingly, durable manufacturing is the most important contributor in this respect. But retail and wholesale trade accelerated at a greater rate in1996-8 than durable manufacturing did. Nordhaus cautions however that the data in this area are not entirely established or understood. Similarly, evidence suggesting the service and construction sectors performed poorly in the same period may well result from their questionable price indexes, which is why he excluded them from his well-measured output index. In any case, Nordhaus concludes that while new economy industries have demonstrated acceleration of productivity growth in recent years, there has also been a substantial concurrent upturn in such growth in much of the traditional economy.

-- Matt Nesvisky