Nick Bloom, Macro Topics, Spring 2007 Nick Bloom The US Productivity Miracle Associated class reading: Atkenson & Kehoe (2007)

Nick Bloom, Macro Topics, Spring 2007 European productivity had been catching up with the US for 50 years…

Nick Bloom, Macro Topics, Spring 2007 The US resurgence is commonly known as the “productivity miracle”.

Nick Bloom, Macro Topics, Spring 2007 The “productivity miracle” started as computer price falls started to accelerate.

Nick Bloom, Macro Topics, Spring 2007 Source: Oliner and Sichel (2000, 2005) See also Jorgenson (2001, AER) and Stiroh (2002, AER) Interestingly, in the US the “miracle” appears linked in particular to the “IT using” sectors…

Nick Bloom, Macro Topics, Spring Change in annual growth in output per hour from 1990–95 to 1995–2001 % ICT - using sectors ICT - producing sectors Non - ICT sectors U.S EU Increase in annual growth rate–from 1.2% in 1990–95 to 4.7% from 1995 Static growth–at around 2% a year– during the early and late 1990s … but no acceleration of productivity growth in Europe in the same IT using sectors. Source: O’Mahony and Van Ark (2003, Gronnigen Data and European Commission)

Nick Bloom, Macro Topics, Spring 2007 And Europe also did not have the same IT investment boom as the US

The general belief among US Policymakers (and Economists) this is linked to IT and organization “The acceleration in US productivity may be plausibly accounted for by a pickup in capital services per hours worked and by increases in organizational capital, the investments business make to reorganize and restructure themselves, in this instance in response to newly installed information technology” Economic Report of the President, February 2006 (p26) I will briefly survey three papers on this – the first in more detail

Nick Bloom, Macro Topics, Spring 2007 Tim Bresnahan, Erik Brynolfsson and Lorin Hitt “Information technology, workplace organization and the demand for skilled labor: firm-level evidence” Quarterly Journal of Economics (2002)

Nick Bloom, Macro Topics, Spring 2007 Provided first good econometric evidence on the link between returns to IT and organization Collected new data on IT use and organization in firms, to go beyond ‘case-studies’ Estimated the direct and interaction effects in a panel of firms: IT and organizational change are complementary with each other (the big result, in hindsight) These are both skill biased (“skilled-biased technical change” was a big late 1990s / early 2000s research theme) A very important paper. Provided the first good evidence on IT and organizational complementarities – something that appears to play a major role in explaining US growth Interestingly, the identification and data are actually pretty weak (although I think the results are right, as did the referees I guess)

Nick Bloom, Macro Topics, Spring 2007 Incredibly well cited paper for its vintage…

Nick Bloom, Macro Topics, Spring 2007 They first collected new data on IT and organizations Ran a telephone survey on organisational structure and skills on a sample of 780 firms which they had both IT and accounts data for 380 of these firms responded – providing their empirical data of matched IT, organization and accounting information There are some issues with the data: Sample selection (IT and Org responding firms) Cross-sectional (organization and skills data) No natural identification in data (no big experiment, discontinuity, treatment group etc….)

Nick Bloom, Macro Topics, Spring 2007 Test complementarity estimating correlations and production function results Assume IT and O are two factors of production Q=F(IT,O,X) where X is all other factors Complementarity of IT and O in production assumes the following ∂ 2 Q/∂IT∂O > 0 (like supermodularity) Examining this typically involves testing for two things: (1) Estimating the interaction directly in (some second-order Taylor expansion of) the production function, for example β 3 >0 in: log(Q) = β 0 + β 1 log(IT) + β 2 log(O) + β 3 log(IT)×log(O) +…… (2) Exploiting the implication of optimality (FOCs), which implies IT and O should be correlated in levels, for example β 1 >0 in: log(IT) = β 0 + β 1 log(O) + …..

Nick Bloom, Macro Topics, Spring 2007 BBH report evidence for complementarities between IT and decentralization in the production function

Nick Bloom, Macro Topics, Spring 2007 BBH report evidence for correlations of IT factor intensity and decentralization

Nick Bloom, Macro Topics, Spring 2007 Conclusion Paper which has had a huge impact from being ‘first to market’ in providing empirical support for a key stylized fact How did they do it – by collecting their own data This is another area for fertile research – collecting new data to build on current data sets (firms, industries or even countries)

Nick Bloom, Macro Topics, Spring 2007 Erik Brynolfsson and Lorin Hitt “Computing Productivity: Firm-level Evidence” Review of Economics and Statistics (2003)

Nick Bloom, Macro Topics, Spring 2007 Provides evidence that the returns to IT take time to arise, and are ‘supernormal’ in the long run Initial view of computers was the Solow paradox (1986), “We see computers everywhere but in the productivity statistics” They reverse this finding excess returns to IT, but with a lag Their results (see over) suggest that investment in IT requires some associated investment in organisational capital –Explains the delayed returns to IT (time to reorganize) –Explains excess returns (IT picks up this omitted factor) This paper also contains my favourite anecdote – the ‘black windows factory’

Nick Bloom, Macro Topics, Spring 2007 The returns to IT are supernormal and slow to arise

Nick Bloom, Macro Topics, Spring 2007 Nick Bloom, Raffaella Sadun and John Van Reenen “American do I.T. better: US multinationals and the productivity miracle” NBER WP (2007)

Nick Bloom, Macro Topics, Spring 2007 Provides evidence that US multinationals in the UK have also had a productivity miracle Try to understand what explains the US productivity miracle: –One story is organization –Another story is land-use (McKinsey) Test between these by comparing US multinationals in the UK to non-US multinationals in the UK, finding –US MNEs have much higher returns to IT (and investment more in IT), and very robust –Also provide organization data showing US firms really are different (both in the US and in Europe) Suggests US firms really do I.T. better, then build a model of this around regulation and endogeneous organizational structure

Nick Bloom, Macro Topics, Spring 2007 Also provides evidence of the power of great titles (especially with the media) Never underestimate the power of the title….. One journalist in London even rang me up based on the title alone (thinking it was about something completely different….) …….but I ended up doing an interview for BBC World Service Business anyway (we got talking about the paper and he passed on my details)

Nick Bloom, Macro Topics, Spring 2007 So what are the big (policy) questions? What caused the productivity miracle? Effect use of IT from mid 1990s onward which required extensive reorganization of firms Why in the US and not Europe? European labor-regulation and strong unions prevented the complementary reorganization from occuring Will this high level of US productivity growth continue? Tough to call – my guess (based on our paper and my reading of the data) is no

Nick Bloom, Macro Topics, Spring 2007 And what about the big research questions? How to macro model new technologies, reorganization and vintages So far the literature has been micro dominated (at least to an impartial observer…) But presumably GE effects play a role Cue Atkenson and Kehoe (2007)….