Investigating the Indirect Consequences of Advancements in Information Technology on US Productivity

Abstract

The slowdown in productivity growth in most developed countries in recent years have been puzzling. We attempted to provide explanations for this puzzle by analysing it from the perspective of Information Technology – more specifically, how innovations in both hardware and software have indirectly contributed to the reduction in aggregate productivity levels in the US. This first part of the paper looked at how much official semiconductor manufacturing price indexes have understated the pace of deflation through the use of hedonic indexes. We then calculated how it would have affected the aggregate productivity level if these indexes were used instead of official price indexes. We extended the research done by Byrne, Oliner and Sichel (2017) to include data for the hedonic index for years 2014-2016, but found that the impact on aggregate productivity was unsubstantial (in 2011, the US labour productivity level would have increased by 0.17%). The second part of this paper investigated the role of software in creating productivity sinks in the US economy, and quantified their impact on aggregate productivity. By using our own hypothetical productivity index, we showed that by excluding specific service industries from calculation, the aggregate productivity level would’ve been increased by around 1% in 2016. We further used panel data econometrics across different US industries to show that software investment has a negative relationship with employment growth, and that the same relationship holds for employment and productivity growth, thus proving our hypothesis that software adoption played a major role in the creation of productivity sinks. However, although these factors alone were not enough to fully explain the productivity slowdown, as even when taking them into account the sharp slowdown in productivity growth in the US would still persist, they did provide useful insights and contributed to current literature.