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14122_ERP - 2007 developing new skills When the rewards to...

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Unformatted text preview: 2007 developing new skills. When the rewards to gaining skills increase, workers have increased incentive to acquire additional skills. For example, over the past 30 years, there has been a substantial widening in the difference between pay for workers with a bachelor’s degree and pay for those with only a high school diploma. For men, this difference grew from 50 percent in 1975 to 87 percent in 2004. If this widening in pay differences represents an increase in the amount a worker gains by getting a college education, then it gives individuals a greater incentive to make such an investment in education. Over the last 10 years, there has been an increase in the percentage of people who choose to go to college rather than enter the workforce directly out of high school. In 1992, the size of the workforce with some college education was roughly the same as the size of the workforce with a high school diploma or less. By 2006, the workforce with at least some college had become 50 percent larger than the workforce with no college. Other levels of education, such as master’s and doctoral degrees, have shown similar increases in the rewards for obtaining such a degree and in the number of people choosing to make that investment. From 1987 to 2003, wages for those with an advanced degree increased faster than for those of any other education group, and since the mid-1990s, the share of people age 30–39 with an advanced degree has increased by 38 percent. Thus increased demand for skilled workers has been followed by an increase in supply, which raises the average skill level in the economy and leads to higher average productivity. Understanding the Acceleration in U.S. Productivity: Industry Analysis Understanding why productivity growth in the United States has increased requires knowing what factors in the economy have changed. Chart 2-1 demonstrated that most of the recent increase came about through greater capital deepening and efficiency gains. What the chart did not tell us is why businesses increased their rates of capital investment to bring about capital deepening and why efficiency gains have been higher in the past decade than they were for much of the previous two decades. Productivity growth for the economy as a whole comes from investment and innovation in a wide variety of businesses. A lot can be learned about the sources of growth by looking at which kinds of investments have grown most quickly, as well as which industries have had the fastest productivity growth. The average rate of productivity growth hides substantial differences across industries. In particular, the surge in productivity in the late 1990s appears to be a story of growth in industries making and using IT capital. Chart 2-3 54 | Economic Report of the President 2007 illustrates that efficiency growth since 2000 has been particularly strong in the high-tech sector, but that it has also been strong in the distribution sector, which includes retail and wholesale trade, transportation, and warehousing. Finance and business services also showed strong efficiency growth and hence strong productivity growth. Manufacturing, which has made small investments in IT capital compared to the other sectors shown, has had the slowest recent growth in efficiency. The strong productivity growth in the distribution and financial services sectors highlights one of the most striking differences between the pre- and post-1995 periods. From the 1970s through 1995, productivity growth in goods-producing industries was generally greater than that in service-providing industries. However, since 1995, productivity growth in service-providing industries has exceeded the growth in goods-producing industries (such as manufacturing). Given this difference, one of the most important insights into the recent period of productivity growth comes from understanding why service-sector productivity growth accelerated after a long period of slow growth. As discussed above, capital deepening and efficiency growth accounted for most of the acceleration of productivity growth for the U.S. economy as a whole over the last decade. Chapter 2 | 55 2007 In examining productivity growth rates over the recent period, researchers have found it useful to characterize investments by whether they involve a purchase of IT equipment, which is usually defined as computer hardware, software, and telecommunications equipment. Box 2-1 discusses some of the potential mechanisms, such as intangible capital accumulation, through which IT capital leads to productivity improvements. Box 2-1: Intangible Capital and IT Investment While information technology clearly accounts for a sizable share of productivity growth since 2000, the mechanisms through which it induced this growth are not as clear. The assumption has been that since efficiency growth has been the largest contributor to productivity in this recent period, IT gains are embedded in this growing efficiency. However, hidden within these increases in efficiency may also be capital growth not captured in official measures. Standard measures of capital primarily count physical capital, but businesses expend resources on many other activities that aim to increase the value of future output. Some examples are research and development spending, revamping a business’s organization, advertising aimed at improving consumers’ perceptions of a business’s brand, or developing a secret recipe. These kinds of activities are often called intangible investment because they build up assets that are valuable to firms but are not easily measured. Conceptually, these activities qualify as capital investment, but they are not currently included in official capital measures because they are hard to measure. Why does this matter when discussing productivity? Expanding the definition of capital by including intangibles would change the shares of the factors contributing to labor productivity growth, increasing the share attributed to capital deepening and reducing the share attributed to efficiency gains. This shift would not only call into question the finding that IT investment contributed to productivity mainly through efficiency gains, but would also help explain why productivity did not accelerate with early waves of IT investments. Indeed, it is consistent with the hypothesis that for businesses to take full advantage of their IT investments, they needed to develop innovative business practices. Only when they made intangible investments to complement their IT investments did productivity growth really take off. 56 | Economic Report of the President 2007 The industries that produce IT equipment had particularly rapid efficiency growth, resulting in falling prices accompanied by rapid increases in the speed and power of IT equipment. These industries directly brought up the average rate of productivity growth for the economy, but their advances also had significant indirect effects by driving a surge in IT equipment investment in other industries. The increase in capital deepening in the 1990s was led by large investments in IT equipment, but productivity gains from these investments did not immediately emerge. In the 1995 to 2000 period, industries with above-average investment in IT equipment had significantly larger increases in their productivity growth rates than did other industries. For example, the retail trade and financial services industries had much higher productivity growth over the 1995 to 2000 period than in the preceding period, and had well-above-average investment in IT equipment. Box 2-2 indicates that much of the retail trade productivity gains occurred because of supply chain improvements made possible by information technology. Research estimating the contribution of IT-related forces—including both productivity growth in IT-producing industries and the share of productivity growth accounted for by IT investment in other industries—shows that information technology accounted for more than half of productivity growth from 1995 to 2000. Box 2-2: Information Technology, the Supply Chain, and Productivity Growth in Retail Trade The retail trade sector shows how IT investment, innovation, competition, and flexible markets interact to affect productivity growth. Retailers have made heavy investments in information technology and have had rapid productivity growth, but changes in the way that retailers use information technology—both in their stores and with their suppliers—were necessary to generate this surge in productivity growth. The focus here is on two types of innovations: changes in the organization of the supply chain of consumer goods and changes in the way retailers organize store operations. Manufacturers and retailers of consumer goods have increased their use of electronic data interchange, allowing manufacturers to help retailers manage inventories and avoid stockpiling and shortfalls. Electronic data interchange also allows for automatic ordering, billing, and payment. Retailers benefit from lower costs of carrying inventory and reduced resources spent managing it, and manufacturers benefit continued on the next page Chapter 2 | 57 2007 Box 2-2 — continued from being able to smooth out production. Because these changes have enabled retailers to more reliably stock a wide variety of goods, consumers have benefited from increased product variety. Making these changes required an investment in IT equipment by manufacturers and retailers, and required them to change the way they exchanged information and interacted. Large retailers also made internal changes that significantly increased productivity. One change was an increase in the scale of stores. Other important changes involved the use of information technology and improved management practices. Examples include an increased use of software to manage the flow of goods and staffing levels in stores, and more cross-training of employees to make better use of store labor. Rapid expansion of the largest firm put competitive pressure on other retailers, leading them to cut costs and, in many cases, to emulate the process improvements introduced by the industry leader. Why Has Productivity Growth Accelerated in the U.S. While Slowing in Other Countries? The United States has experienced the fastest acceleration of productivity growth among major industrialized countries since the early 1990s. Chart 2-4 shows that, after lagging behind most of the countries in the G7 between 1990 and 1995, the United States has been the country with the fastest growth in GDP per hour worked in the G7 between 2000 and 2005. Only the United States and Japan had faster productivity growth in the most recent period than they did in the early 1990s, and only the United States has shown consistent acceleration over this time period. Since all of these countries have, in principle, approximately the same access to information and global markets, why have the other major industrialized countries not been able to post productivity gains as large as those in the United States and Japan? The major advances in this period appear to have come from opportunities that developed from the rapid advancement in information technology. While all developed countries had access to IT capital, the existing economic environment in the United States put it in position to quickly make the most of these opportunities. International openness to investment and trade combined with highly flexible and lightly regulated markets and an environment that fosters innovation appear to be at least part of the answer. 58 | Economic Report of the President ...
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