Evidence from the United States

Historically, productivity growth was not all about high tech sectors and research and development (R&D) expenditure. A new study published The Economic Journal finds that the great majority of productivity originated in other, more ‘run-of-the-mill’ industries.

During the early 20th Century, the United States was at the forefront of important new technological developments in electricity, the internal combustion engine, chemicals and the entertainment, communication and information sector. While prevailing accounts suggest that these four ‘great inventions’ drove productivity growth, Gerben Bakker, Nicholas Crafts and Pieter Woltjer argue that instead it was the large and generally unglamorous sectors that used the great inventions effectively.

It was these sectors, such as agriculture, foods, distribution and construction, which accounted for a sizeable share of productivity growth during 1899-1941. Given their relative size, even a small productivity increase had a large overall impact, whereas high productivity growth in small emerging industries only had a minor impact.

The study also shows that contributions by sectors to aggregate total factor productivity (TFP) growth, which measures output growth that cannot be explained by traditional inputs such as labour and capital, were not dominated by the relatively few sectors that had the vast majority of R&D inputs.

The authors find that only a modest relationship existed between the growth of research scientists and productivity growth across industries. The big distribution sector did hardly any R&D at all but accounted for more than 15% of interwar productivity growth. These findings put declining R&D productivity as the cause for the recent productivity slowdown somewhat in perspective.

As the researchers explain, technological change is the ultimate source of sustained productivity growth and thus of long-run increases in living standards. Economic growth can come from using additional labour or capital inputs, or from using these inputs more effectively—which constitutes technological change or Total Factor Productivity (TFP). Since the amount of labour and capital that can be added has limits, growth in TFP is key to long-run growth.

For output growth projections, the future TFP growth rate is fundamental. The authors note that the recent productivity slowdown in the United States has largely been driven by a significant decline in TFP growth. Estimates of business sector trend TFP growth decreased from 1.6% per year in the late 1990s to 0.4% in the last ten years, from 2007 to 2018.

Many have argued that this fall is likely to persist. The economist Robert Gordon even suggested that innovation has died, and growth has come to an end. Gordon attributed the rapid growth during the mid-twentieth century to the previously mentioned four great inventions and argues that nothing similar is foreseeable today. By showing that only about 40 percent of pre-war aggregate TFP growth originated from these technology clusters and that overall growth was slower than hitherto assumed, this study questions this pessimistic perspective.

AUTHORS: Gerben Bakker, Nicholas Crafts and Pieter Woltjer

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