American Economic Growth in the Information Age

The information age

Semiconductor prices

To assess the impact of IT on productivity growth, it is essential to have price indexes that separate the change in the performance of IT equipment from the change in the price for a given level of performance. Precise and up-to-date computer prices have been part of the U.S. National Income and Product Accounts (NIPA) since 1985, but significant intelligence gaps remain in the costs of software, telecommunications equipment and other high-tech products and goods.

Figure 1 gives semiconductor price indexes employed in the U.S. national accounts since 1996. These are divided between memory chips and logic chips.

Jorgenfig01_e

Prices of memory chips, holding performance constant, decreased by a factor of 27,270 times or 40.9 percent per year between 1974 and 1996. Similarly, prices of logic chips that hold performance constant, available for the shorter period 1985 to 1996, decreased by a factor of 1,938 or 54.1 percent per year. Semiconductor price declines closely parallel Moore’s Law on the growth of chip capacity.

Figure 1 also reveals a sharp acceleration in the decline of semiconductor prices in 1994 and 1995. The microprocessor price decline leapt to more than 90 percent per year as the semiconductor industry shifted from a three-year product cycle to a greatly accelerated two-year cycle. This is reflected in the 2000 Update of the International Technology Road Map for Semiconductors,[ 1 ] prepared by a consortium of industry associations.

Computer prices

The introduction of the Personal Computer (PC) by IBM in 1981 was a watershed event in the deployment of information technology. The sale of Intel’s 8086-8088 microprocessor to IBM in 1978 for incorporation into the PC was a major business breakthrough for Intel. In 1981, IBM licensed the MS-DOS operating system from the Microsoft Corporation, founded by Bill Gates and Paul Allen in 1975

Mainframe computers, as well as PCs, have come to rely heavily on logic chips for central processing and memory chips for main memory. However, semiconductors account for less than half of computer costs, and computer prices have fallen much less rapidly than semiconductor prices.

Figure 2 gives a constant performance price index of computers and peripheral equipment and its components, including mainframes, PCs, storage devices, other peripheral equipment and terminals. The decline in computer prices follows the behaviour of semiconductor prices presented in Figure 1, but in much attenuated form. The 1995 acceleration in the computer price decline mirrors the acceleration in the semiconductor price decline caused by the changeover from a three-year product cycle to a two-year cycle in 1995.

Jorgenfig02_e

Communications equipment and software prices

Communications technology is crucial for the rapid development and diffusion of the Internet, perhaps the most striking manifestation of information technology in the American economy. Communications equipment is an important market for semiconductors, but constant performance price indexes cover only switching and terminal equipment. Much communications investment takes the form of the transmission gear, connecting data, and voice and video terminals to switching equipment.

Technologies for transmission, such as fibre optics, microwave broadcasting and communications satellites, have progressed at rates that outrun even the dramatic pace of semiconductor development. An example is dense wavelength division multiplexing (DWDM), a technology that sends multiple signals over an optical fibre simultaneously. Installation of DWDM equipment, beginning in 1997, has doubled the transmission capacity of fibre-optic cables every six to twelve months.

The American growth resurgence

The American economy underwent a remarkable resurgence in the second half of the 1990s with accelerating growth in output and productivity. My next objective is to quantify the sources of growth for 1948-1999 and various sub-periods. My primary focus is the sharp acceleration in the level of economic activity since 1995 and, in particular, the role of information technology.

Economic growth

The most striking feature is the rapid fall in the price of computer investment, 15.8 percent per year from 1990 to 1995. Since 1995, this decline has more than doubled to 32.1 percent per year. By contrast, the relative price of software fell only 1.6 percent per year from 1990 to 1995 and 2.4 percent per year since 1995. The fall in the price of communications equipment has been similarly modest, while the fall in the price of information technology services sits somewhere between those of hardware and software prices.

Accounting for growth

The growth in ALP can be derived from three sources. The first is capital–labour substitution. The second is improvement in labour quality and captures the rising proportion of hours by workers with higher productivity. The remainder or third component adds a percentage point to ALP growth for each percentage point of TFP growth.

Massive increases in computing power, like those experienced by the U.S. economy, have two effects on growth. First, as IT producers become more efficient, more IT equipment and software are produced from the same inputs. This raises productivity in IT -producing industries and contributes to TFP growth for the economy as a whole. Labour productivity also grows at both industry and aggregate levels.

Second, investment in information technology leads to growth of productive capacity in IT-using industries.[ 4 ] Since labour is working with more and better equipment, this increases ALP through capital deepening. If the contributions to aggregate output are entirely captured by capital deepening, aggregate TFP growth is unaffected since output per unit of input remains unchanged.

Sources of growth

Jorgenfig03_e

 

Average labour productivity

JorgenTab03_e

The growth of ALP slipped further during the early 1990s with a slump in capital deepening only partly offset by a revival in labour quality growth and an up-tick in TFP growth. A slowdown in hours combined with slowing ALP growth during 1990-1995 to produce a further slide in the growth of output. In previous cyclical recoveries during the postwar period, output growth accelerated during the recovery, powered by more rapid growth of hours and ALP.

Figure 4

Accelerating output growth during 1995-1999 reflects growth in labour hours and ALP almost equally. Growth in ALP rose 0.92 percent as more rapid capital deepening and growth in TFP offset slower improvement in labour quality. Growth in hours worked accelerated as unemployment fell to a 30-year low. Labour markets have tightened considerably, even as labour force participation rates increased.

Chart 4 shows the acceleration in ALP growth is due to capital deepening as well as faster TFP growth. Capital deepening contributed 0.60 percentage points, offsetting a negative contribution of labour quality of 0.20 percent. The acceleration in TFP added 0.51 percentage points.

As shown in Table 1, the growth rate of labour input accelerated to 2.18 percent for 1995-1999 from 1.70 percent for 1990-1995. This is primarily due to the growth of hours worked, which rose from 1.17 percent for 1990-1995 to 1.98 percent for 1995-1999, as labour force participation increased and unemployment rates plummeted. The growth of labour quality declined considerably in the late 1990s, dropping from 0.53 percent for 1990-1995 to 0.20 percent for 1995-1999. This slowdown captures well-known demographic trends in the composition of the work force, as well as exhaustion of the pool of available workers.

Long-term outlook

The key assumption for long-term projections is that output and capital stock must grow at the same rate. Under this assumption the growth of output is the sum of the contributions of hours worked and labour quality, the contribution of capital quality growth and the rate of TFP growth. So long as the two-year product cycle for semiconductors continues, the growth of TFP is likely to average 0.75 percent per year, the rate during 1995-1999.

The long-term growth of hours worked and labour quality will average 1.5 percent per year. Growth of hours worked will slow considerably to remain in line with future growth of the labour force of 1.2 percent per year.

Weighting this growth rate by the proportion of capital input in the GDP of 40.7 percent in 1999 generates a future contribution of capital quality of 0.9 percent per year.

Economics on Internet time

I conclude by underlining some of the uncertainties that still surround the development and diffusion of information technology. Highest priority must be given to a better understanding of markets for semiconductors and especially the determinants of the product cycle. Improved data on the prices of telecommunications and software are essential for understanding the links between semiconductor technology and the growth of the American economy.

The semiconductor industry and the information technology industries are global in their scope with an elaborate international division of labour.[ 6 ] This poses important questions about the American growth resurgence.

Information technology is altering product markets and business organizations, as attested by the huge and rapidly growing business literature.[ 7 ] But a fully satisfactory model of the semiconductor industry remains to be developed. Such a model would have to derive the demand for semiconductors from investment in information technology and determine the product cycle for successive generations of new semiconductors.


Note

*  Dale W. Jorgenson is Frederic Eaton Abbe Professor of Economics at Harvard University.

 1.  International Technology Roadmap for Semiconductors, 2000 Update (Austin, Texas: Sematech Corporation, December 2000). See: http://public.itrs.net/.

 2.  For a description of the 11th comprehensive revision of NIPA and the 1999 update, see B.R. Moulton, “Improved Estimates of the National Income and Product Accounts for 1929-99: Results of the Comprehensive Revision,” Survey of Current Business, Vol. 80, no. 4 (April 2000), pp. 11-7, 36-145.

 3.  For details on the estimates of outputs and inputs, see D.W. Jorgenson and K.J. Stiroh, “Raising the Speed Limit: U.S. Economic Growth in the Information Age,” in W.C. Brainard and G.L. Perry (eds.), Brookings Papers on Economic Activity, 2000, 1 (Washington DC: The Brookings Institution, 2000), pp. 125-211.

 4.  Economics and Statistics Administration, Digital Economy 2000 (Washington, D.C.: U.S. Department of Commerce, June 2000). Table 3.1, p. 23, lists IT-producing industries.

 5.  D.W. Jorgenson, “Information Technology and the U.S. Economy,” American Economic Review, Vol. 91, no. 1 (March 2001), pp. 1-32.

 6.  The role of information technology in U.S. economic growth is discussed by the Economics and Statistics Administration, op. cit.; comparisons among OECD countries are given by the Organisation for Economic Co-operation and Development, A New Economy? (Paris: Organisation for Economic Co-operation and Development, 2000).

 7.  On the market for computers and semiconductors, see, for example, A.S. Grove, Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company (New York: Doubleday, 1996). On the market for storage devices, see C.M. Christensen, The Innovator’s Dilemma (Boston: Harvard Business School Press, 1997).

 8.  See, for example, C. Shapiro and H.R. Varian, Information Rules (Boston: Harvard Business School Press, 1999); E. Brynjolfsson and B. Kahin, Understanding the Digital Economy (Cambridge, Massachusetts: The MIT Press, 2000); and S.-Y. Choi and A.B. Whinston, The Internet Economy: Technology and Practice (Austin, Texas: SmartEcon Publishing, 2000).