The Early 21st Century U.S. Productivity

Expansion is Still in Services

Bethany Poller10-11-10

AuthorsAuthorsBarry P. Bosworth

◦Former presidential advisor◦Expert on fiscal and monetary

policy, economic growth, capital formation and Social Security

Jack E. Triplett◦Has worked on issues relating to

productivity analysis and price index and national accounts measurement

◦ Particularly interested in methodological issues in estimating price, output and productivity measures for goods/services that exhibit rapid quality and technological improvements

Previous work togetherPrevious work together“Services Productivity in the United States:

New Sources of Economic Growth,” 2004

“Baumol’s Disease Has Been Cured: IT and Multifactor Productivity in U.S. Services Industries,” 2006

“The State of Data for Services Sector Productivity Measurement,” 2007, unpublished

“Services productivity in the United States:Griliches’ Services Volume Revisited,” 2007

IntroductionIntroduction

The 20th century ended with an unexpected surge in U.S. productivity growth. While earlier studies had focused on productivity growth in computer and semiconductor production and information technology (IT) factors, Triplett and Bosworth have looked at the productivity in services industries.

Productivity measurementsProductivity measurements

Labor productivity (LP) measures the output per unit of labor input

Multifactor productivity (MFP) measures the changes in output per unit of combined inputs: labor, materials and capital

DataDataThe Bureau of Economic Analysis substantially

improved its methodology for constructing its industry dataset

Introduced the North American Industry Classification System (NAICS)

These changes were introduced into the Bureau of Labor Statistics capital services measures, which provide the capital input measure for the MFP computations in this study.

57 industries: 23 goods industries and 34 services industries

Data continuedData continuedThe LP estimates for the aggregate of non-

farm business used in the study differ somewhat from the published BLS series because of differences between what’s measured in BLS and BEA data and how. The researchers calculated data using parts of both sets of data.

Data series show similar short-run trends: post-2000 LP growth for non-farm business exceeded growth in 1995-2000 and growth has slowed since 2004

Productivity change in 1995-2000 Productivity change in 1995-2000 periodperiod

The major finding for pre- and post-1995 periods in authors’ book, that productivity growth in the services sector accelerated much more after 1995 than productivity in the goods sector, is confirmed, but the magnitudes of the estimates is considerably smaller using the new numbers.

Productivity Growth, Productivity Growth, direct, average annual rate of changedirect, average annual rate of change

1987-95 1995-2000

Labor productivity

Non-farm business 1.4 2.5

Goods Sector 2.4 3.0

Services Sector 1.1 2.3

Multifactor Productivity

Non-farm business 0.9 1.6

Goods sector 1.8 2.3

Services Sector 0.5 1.3

Early 21Early 21stst century century

Services sector productivity growth has continued to grow in the beginning of the 21st century, while goods sector LP and MFP both declined after 2000.

Non-farm business LP and MFP growth rates have held up in the face of declines in the goods sector rates because the services sector has made up the gap.

Productivity Growth, Productivity Growth, direct, average annual rate of changedirect, average annual rate of change

1987-95 1995-2000 2000-05

Labor productivity

Non-farm business 1.4 2.5 2.5

Goods Sector 2.4 3.0 2.9

Services Sector 1.1 2.3 2.4

Multifactor Productivity

Non-farm business 0.9 1.6 1.7

Goods sector 1.8 2.3 1.9

Services Sector 0.5 1.3 1.5

IT investment vs. MFPIT investment vs. MFPInvestment boom in 1995-2000 (mostly in

IT investment)

IT investment contributed to the rise in services sector LP growth (1.0 points), but MFP made a larger contribution (1.3).

The strong contribution of services MFP carried over to non-farm LP growth, contributing more than a third of it.

IT investment after 2000IT investment after 2000After 2000, IT capital decreased and the only

contributing factor that held non-farm business LP at the same level of growth was services MFP; all the other factors decreased.

IT’s role in LP acceleration has been overemphasized. While it is an important factor, it is not the only one, and has actually contributed less than services MFP.

Resource reallocationsResource reallocations

Direct productivity measures vs. industry productivity measures

Reallocations have typically reduced the direct productivity rates

Few productivity researchers have paid attention to resource allocations and it hasn’t mattered much

LP by Sector and LP by Sector and Reallocations,Reallocations,average annual percent changeaverage annual percent change

1987-95 1995-2000

Non-farm business 1.9 3.4

Labor reallocation -0.3 -0.1

Intermediate input reallocation -0.2 -0.8

Non-farm business (direct) 1.4 2.5

Aggregated goods industries 2.3 3.2

Labor reallocation -0.1 -0.3

Intermediate input reallocation 0.2 0.1

Goods sector (direct) 2.4 3.0

Aggregated services industries

1.8 3.5

Labor reallocation -0.3 0.1

Intermediate input reallocation -0.4 -1.2

Services sector (direct) 1.1 2.3

LP by Sector and LP by Sector and Reallocations,Reallocations,average annual percent changeaverage annual percent change

1995-2000 2000-05

Non-farm business 3.4 2.5

Labor reallocation -0.1 -0.4

Intermediate input reallocation -0.8 0.4

Non-farm business (direct) 2.5 2.5

Aggregated goods industries 3.2 2.2

Labor reallocation -0.3 -0.1

Intermediate input reallocation 0.1 0.7

Goods sector (direct) 3.0 2.9

Aggregated services industries 3.5 2.7

Labor reallocation 0.1 -0.5

Intermediate input reallocation -1.2 0.2

Services sector (direct) 2.3 2.4

ConclusionsConclusions

Two forces drove the 1995-2000 productivity expansion: investment, much of it in IT, and MFP, much of it in services industries.

Post-2000 productivity was driven again by investment, now not primarily in IT, and by productivity advance in services.

ConclusionsConclusions

Resource reallocations must also be considered to fully answer how productivity growth is changing.