October 2002, Vol. 125, No.10
Précis from past issues
The impact of technological change on the economy continues to attract research attention. A recent issue of the Federal Reserve Bank of Atlanta Economic Review was largely dedicated to a short summary of and the text of four papers from a Bank-sponsored conference on "Technology, Growth, and the Labor Market." Dale W. Jorgenson, Mun S. Ho, and Kevin Stiroh and Stephen D. Oliner and Daniel E. Sichel refine and extend the growth accounting framework to project growth in labor productivity. Both papers suggest that labor productivity will sustain a growth rate of 2 percent or a bit more depending on the rate of progress in the semiconductor industry and, according to conference discussant John Fernald, the extent to which the costs of adjustment to new technologies have been paid.
David Card and John E. DiNardo examine the evidence on the skill-biased technological change explanation for the rise in wage inequality over the past two decades. They find that the bulk of the rise in overall wage inequality had occurred by the mid-1980s, the time personal computers first became widely distributed. Also, they show that the most rapid rise in the premium to a college education occurred in the 1980s. They conclude that, while skill-biased change has some impact on wage inequality, other explanations have to be considered.
Edward N. Wolff’s article, "Productivity, Computerization, and Skill Change," reaches some thought-provoking conclusions. He finds that in explaining rising rates of labor productivity by regression analysis, "the coefficient of the growth of the mean education of the workforce, while positive, is not statistically significant." On the other hand, coefficients on measures of the substantive complexity of and composite skills required by the industry-occupation distribution of jobs were significant at the 10-percent level, but the effects were not large.
In October 2002, the U.S. Department of Labor hosted the Productivity in the 21st Century Conference at the American Enterprise Institute. Secretary of Labor Elaine L. Chao’s opening remarks outlined several issues that the conference would address: the factors that drive productivity, the relationship between productivity growth and jobs, and the prospects for future productivity growth.
Federal Reserve Board of Governors Chairman Alan Greenspan’s keynote address touched mainly on the first and third themes. In his analysis, producers have had little ability to maintain profit margins by increasing price, so have been concentrating on cost reduction as the means of achieving increased profitability. To reduce costs, firms have reorganized work processes and reallocated resources more productively. In that context, it may be difficult to disentangle how much of the growth in labor productivity output per hour was a transitory result of cutting of fat—reorganizing operations, and exploiting technologies already embedded in the existing capital stock—and how much was a real increase in multifactor productivity.
With respect to the prospects for productivity growth, Chairman Green-span noted that in previous episodes of technological innovation, business practices only slowly adapted to the new technologies. As a result, increases in productivity were spread over a couple of decades. He also warned, however, that while a substantial part of the recent increases in productivity growth rates may be sustainable, "… history does raise some warning flags concerning the length of time that productivity growth continues elevated. Gains in productivity remained quite rapid for years after the innovations that followed the surge of inventions a century ago. But in other episodes, the period of elevated growth of pro-ductivity was shorter. Regrettably, examples are too few to generalize. Hence, policymakers have no substitute for continued close surveillance of the evolution of this current period of significant innovation."
The Conference Board’s 2002 Annual Essay, written by Dale W. Jorgenson and published as part of the business research group’s annual report, also addressed productivity growth and is a good general starting point for persons developing an interest in the issue. Jorgenson first outlines the rapid evolution of semiconductor-based technologies. Because logic chips actually tracked Moore’s "law" of exponential growth in capacity over the 29 years ended with the introduction of the Pentium 4 in November 2000, computing and communications capacity have become faster, better, and far cheaper over time.
The implications of this have been evident as declining prices for technology have led to the accumulation of computers, software, and communications equipment at faster rates than other forms of capital. As a result, according to Jorgenson, both the quantity and quality of capital available to workers have increased and average labor productivity growth has accelerated.
Jorgenson expects that the growth in capital quality will continue at its recent high rate for as long as the semi-conductor product cycle continues at a 2-year interval. Industry sources expect this to be the case at least through 2005, but expect a return to somewhat longer product cycles after that. Still, Jorgenson concludes that while the 4-plus percent growth rates of the late 1990s would be difficult to sustain as product cycles stretch, rates in a range with a central tendency of 3.4 percent are likely over the intermediate term.
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