Information Technology and Labour Productivity Growth: An Empirical Analysis for Canada and the United States

Abstract

Over the past two decades, most industrialized economies have become more information technology (IT) intensive as spending on IT-related goods increased dramatically. All sectors of the economy are experiencing significant changes in the way goods and services are produced and delivered as a result of the increased diffusion and use of information technologies. Two inter-related forces have contributed to these developments. First, communications and information processing costs have fallen dramatically, and this has spurred and deepened globalization. Secondly, globalization, in turn, has advanced technological change by intensifying competition and expediting the diffusion of technology through international trade and foreign direct investment (FDI). In a parallel development, productivity growth in OECD economies has slowed significantly since the early 1970s. The decline has been especially noticeable in the service sector which consumes over 80 per cent of IT goods. This has raised questions related to the implications of IT investments.' Until recently, there has been little empirical evidence that IT capital has contributed to increases in output and productivity growth.2 In this regard, two recent studies carried out on U.S. data deserve specific mention. Berndt and Morrison (1995) examined the impact of investments in high-tech office and information technology capital on productivity growth across two-digit manufacturing industries from 1968 through 1986. They found that increases in high-tech investments are negatively correlated to multi-factor productivity growth. However, they did find some evidence that industries with a higher proportion of high-tech capital had higher measures of economic performance.3 In contrast, Brynjolfsson and Hitt (1995) argued that IT has become a productive investment for many firms. Using data from a large number of firms over the 1988-92 period, they found that while 'firm effects' may account for as much as half of the productivity benefits imputed to IT in earlier studies, the elasticity of IT remains positive and statistically significant.