The Bureau of Economic Analysis released a first revision of GDP numbers for the third quarter today, with growth coming in at a seasonally adjusted annual rate of 3.9 percent. If the number holds, it and the second quarter will mark the strongest consecutive quarters of growth since 2003. That’s not too shabby.
Also out today, Alan Blinder of Princeton University has a piece in the Wall Street Journal, where he argues that not enough attention is being paid to the “dismal” productivity growth occurring the last four years—in part because of the difficulty in forecasting this measure. Productivity growth, of course, is the key to sustained economic growth in the long run, and therefore Blinder’s plea should be hastened. In his commentary, Blinder includes the chart below.
Lately, I’ve been thinking a lot about the role that information and communications technologies (ICTs) have played in long run income and productivity growth the last couple of decades, and in particular, how that impact might be different in the future as a new generation of ICTs has begun to come online—including mobile broadband, cloud computing, big data analytics, and the Internet of Things.
This also fits into a larger debate on the role that ICTs and related technologies are having on the reshaping of industries and of the workforce. David Autor of MIT has documented a polarization of the labor force, and a hollowing-out of middle skill jobs, due in no small part to skill-biased technological change (technology that favors high skilled workers). Erik Brynjolffsson and Andy McAfee, also of MIT, have similarly warned that technology—or more specifically, “the robots”—are coming to take many of our jobs.
Given today’s data release, the Blinder op-ed, the technology and employment debate, a growing discussion about a world of persistently slow growth, and some chatter today on Twitter, I became curious about what role ICTs might be playing in the shorter-term—in the economic recovery of the last few years to be more precise.
To do this, I performed a simple analysis of data from the BEA’s Industry Economic Accounts published between the years 1998 and 2013.[i] First, I identified the “ICT-producing” industries using standard definitions of the computer hardware and software sector. Then, using input-output tables, I identified three groups of “ICT-using” industries based on the intensity of ICT use in production—high (top third), medium (middle third), and low (bottom third). In total, there are 64 industries for which the data are available.[ii]
With these four groups in hand, I calculated growth in three measures—value-add output, employment (full-time equivalent), and labor productivity—from 2009 (the beginning of the recovery) through 2013 (the latest available data). The chart below reflects the compound annual growth rate of the median industry in each group during this period.
The chart provides a few major takeaways. First, the ICT-producing sector has been a strong performer during the recovery—achieving income growth in excess of two times each of the other sectors, and in employment and labor productivity that is unmatched. So, not only is this sector of the economy creating a great deal of wealth during a period of slow growth, it is also a relatively important source of job gains and long-term economic prosperity. Even still, the pace of output growth far exceeds the gains in employment—resulting in the productivity hike.
For the others, the story is a bit more complicated. The high ICT-using sector has created a fair amount of income growth with almost no gains in employment—driving a rise in labor productivity. For the other two ICT-using sectors it has been the opposite—they required relatively more employees to produce similar gains in income, explaining why labor productivity grew less in these segments.
In short, we can say that the sectors in the economy that either produce or highly utilize technological goods and services are creating a relatively large amount of income growth during the economic recovery, while creating jobs at a pace that is relatively low compared with the level of output gains. The opposite is true for the sectors that are less absorptive of technology—they have been relatively more likely to create jobs vis-à-vis income, resulting in less growth of productivity.
This story squares with fairly recent contributions by Michael Spence of NYU and Enrico Moretti of Berkeley. In Spence’sanalysis, he concludes that the segment of the economy that competes globally (tradable) is increasingly responsible for income growth, while simultaneously shedding employment. Businesses in the non-tradable segment of the economy compete locally, circulating income among themselves and absorbing some of the gains that local tradable businesses capture from outside the region. The non-tradable sector produces most of the new jobs, while achieving much lower income growth. In other words, one segment of the economy is increasingly creating wealth and productivity, while the other low-productivity sector is increasingly the source of job creation.
Moretti has similar findings in his book, The New Geography of Jobs, where he describes the same phenomenon occurring in the “innovative sector,” and the local services sector. He finds that the income generated by the innovative sector will increasingly support jobs for workers outside of it, and local authorities should want to attract and cultivate those businesses.
So, if income and productivity growth have been so strong in the innovative, or at least, the technology-oriented sector of the economy, why has productivity growth across the entire economy been so low as Blinder and others have pointed out? The answer in this context is simple: the high-growth sectors are relatively small.
The chart below shows the relative sizes of the four sectors described before—first by value-add output, and secondly by employment (full-time equivalent).
As the data show, the ICT-producing and high ICT-using sectors account for less than 40 percent of output and slightly more than 30 percent of employment. So, despite their relatively strong performance in the economic recovery, their small size has prevented productivity figures for the entire economy to be more robust.
The debate over what’s holding back a broader recovery in the product and labor markets is hardly solved here—nor is the impact that technology has had and will continue to have on that process. But as this simple analysis shows, for now, the sectors of the economy that are most intensely adopting technological goods and services are disproportionately driving productivity in the economic recovery.