Will Fast Productivity Growth Persist_FRBSF EL_04-06-2007

Will Fast Productivity Growth Persist_FRBSF EL_04-06-2007 -...

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FRBSF E CONOMIC L ETTER Number 2007-09,April 6, 2007 Will Fast Productivity Growth Persist? CSIP N OTES CSIP Notes appears on an occasional basis. It is prepared under the aus- pices of the Center for the Study of Innovation and Productivity within the FRBSF’s Economic Research Department. Strong productivity growth is essential for improving living standards and can have an important impact on economic policy, yet economists are far from being experts at predicting when the trend of productivity growth might shift. In the 1960s, productivity growth boomed, growing at an average annual rate of 2 1 / 2 %. It weakened in the early 1970s, and for the next two decades or so averaged an annual growth rate of only about 1 1 / 4 %.Then, in the mid-1990s, productivity growth boomed again, averaging about a 3% annual rate from the last quarter of 1995 through the middle of 2004.These shifts were not predicted and were generally not widely recognized until years after they occurred. Considering that, since the middle of 2004, productivity growth has averaged only about 1 1 / 2 % per year, it may be time to ask whether this is just a “pause” in the boom that started in the mid-1990s or a shift back to the growth rates seen in the 1970s and 1980s.This Economic Letter begins to answer this question by focusing on the factors that underlay the most recent productivity boom and what they may portend for the future. Information and communications technology and the productivity surge Technological innovation is often associated with pro- ductivity booms.The most obvious such innovations in recent decades have been in the production of information and communications technology (ICT), such as computers, software, communications equip- ment, and the like. But the channels for ICT to af- fect the overall economy are complex. Economists identify three proximate or direct sources of higher labor productivity. First, workers have more and better capital to work with, also known as “cap- ital deepening.” Second, the workforce gains more education and skill.Third is total factor productivity, or TFP, a comprehensive term for everything not otherwise explained; the main reason TFP rises over time is innovation in products and processes. Oliner and Sichel (2006) decompose labor productiv- ity growth using annual aggregate data through 2005. They find that in the 1995–2000 period, both faster TFP growth and an increased contribution of capital- deepening raised labor productivity growth relative to the 1973–1995 period.Thereafter,however,investment was relatively weak, and the pace of capital deepen- ing—especially of ICT capital—fell substantially.Yet labor productivity growth remained strong in the early 2000s because TFP growth accelerated even further. Economists generally agree that a TFP acceleration in ICT production was a significant contributor to the acceleration in overall TFP during the 1990s, and the causes of the former are reasonably well understood.
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