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Ifo Institute for Economic Research at the University of Munich ICT, Skills and Productivity

Ifo Institute for Economic Research at the University of Munich ICT, Skills and Productivity Growth US-German High-Skill and ICT Investments Complementarities Thomas Strobel 2009 North American Summer Meeting of the Econometric Society Boston University, June 4– 7 2009

Ifo Institute for Economic Research at the University of Munich Motivation, I • US-German

Ifo Institute for Economic Research at the University of Munich Motivation, I • US-German Comparisons in Labor Productivity Growth Period: 1992– 1995: 1996– 2000: 2001– 2005: Germany: US: 2. 38 1. 53 1. 99 2. 56 1. 28 2. 96 Notes: Annual value added per hours worked. Sources: US is Nonfarm Business Sector (US Bureau of Labor Statistics, 2009), Germany is Total Economy (German Federal Statistical Office, 2009) and authors’ calculations.

Ifo Institute for Economic Research at the University of Munich Motivation, II • US:

Ifo Institute for Economic Research at the University of Munich Motivation, II • US: 2 Productivity Surges – 1. surge post 1995: consensus related to Information and Communication Technology (ICT) § ICT-Production and ICT-Using (spillover) TFP growth (Jorgenson & Stiroh (2000); Oliner & Sichel (2000); Oliner, Sichel & Stiroh (2007) – 2. surge post 2000: broader based § Strong contributions from ICT-Using and market services (Stiroh, 2006, Triplett & Bosworth, 2004) • Germany: Dual Decline – Much weaker ICT effects – ICT effects unable to offset the reduction in Non-ICT industries productivity growth (Eicher & Roehn, 2007, Eicher & Strobel, 2008, 2009)

Ifo Institute for Economic Research at the University of Munich Motivation, III • What

Ifo Institute for Economic Research at the University of Munich Motivation, III • What if we look at the interaction of ICT and skills? What can we learn about German and US industry performance, and productivity contributions? – Capital-skill complementarity (Griliches, 1969) – Empirical evidence for an ICT capital-skill complementarity (e. g. OECD Information Technology Report 2004, 2006; on the firm level: Bresnahan, Brynjolfsson & Hitt, 1995, and Murnane, Levy & Autor, 1999) – Skill-biased technological change (e. g. Acemoglu, 1998, 2002; Aghion, 2002; Hornstein, Krusell and Violante, 2005)

Ifo Institute for Economic Research at the University of Munich Industry Classification, I •

Ifo Institute for Economic Research at the University of Munich Industry Classification, I • Focus: High-skill intensity of industries – High-skill intensity measured by share of high-skilled hours worked in total hours worked – Industry classification: High-skill-intensive are those industries whose share in high-skilled hours worked exceeds the economy-wide median. – Skill data for Germany and US provided by EUKLEMS Growth and Productivity Accounts (Timmer et al. , 2007 a, b) • Separation into high-, medium- and low-skilled workers • High-skilled workers are above bachelor degrees. For US-German comparisons bachelor degrees are assumed to represent similar skill levels (Timmer et al. , 2007 a, b). • Availability of data for 11 industries, where higher aggregates are imputed at lower sectoral levels of aggregation

Ifo Institute for Economic Research at the University of Munich Data: Growth Accounting Databases

Ifo Institute for Economic Research at the University of Munich Data: Growth Accounting Databases • Data and Sources Ifo Industry Growth Accounting Database (IIGAD) EU KLEMS Productivity and Growth Accounts (EUKLEMS) Germany USA • WZ 2003 Classification (1991– 2005) • US-SIC based on SIC KLEMS data for 1970– 2000 extrapolated forward to 2005 using NAICS • Capital Accounts: Ifo Investment Database, Ifo studies and surveys • Capital Accounts: Jorgenson, Ho and Stiroh, 2005, and BEA investments mapped to JHS – 3 ICT assets: • Software investments • Communication equipment • Computers and Office equipment – 9 Non-ICT assets – ICT price adjustments: Groningen, ICT price deflators (based on BEA) • Labor Accounts: German Federal Statistical Office, Income Survey, Social Security Data, Socio-Economic Panel – Hours worked (employed and self-employed) – Hours skill formation (high, medium, low skilled) – 3 ICT assets: • Software investments • Communication equipment • Computers equipment – 5 Non-ICT assets – BEA ICT prices deflators • Labor Accounts: Census of Population, Current Population Survey, US NIPA – Hours worked (employed and self-employed) – Hours skill formation (high, medium, low skilled)

Ifo Institute for Economic Research at the University of Munich German-US Productivity Growth Contributions

Ifo Institute for Economic Research at the University of Munich German-US Productivity Growth Contributions By Industry Type and High-Skill Intensity, I • ALP Growth Contributions by Goods-Producing Industries Notes: Hours reallocation excluded. Sources: EUKLEMS Growth and Productivity Accounts (2008), IIGAD (2008) and Eicher and Strobel (2009)

Ifo Institute for Economic Research at the University of Munich German-US Productivity Growth Contributions

Ifo Institute for Economic Research at the University of Munich German-US Productivity Growth Contributions By Industry Type and High-Skill Intensity, II • ALP Growth Contributions by Services Notes: Hours reallocation excluded. Sources: EUKLEMS Growth and Productivity Accounts (2008), IIGAD (2008) and Eicher and Strobel (2009)

Ifo Institute for Economic Research at the University of Munich German-US Sectoral ALP Growth

Ifo Institute for Economic Research at the University of Munich German-US Sectoral ALP Growth Contributions, I 1992– 1995 OTHER, ICT-Using HS, ICT-Producing OTHER, ICT-Using Notes: HS = High-Skill Intensive. Hours reallocation excluded. Sources: EUKLEMS Growth and Productivity Accounts (2008) and IIGAD (2008).

Ifo Institute for Economic Research at the University of Munich German-US Sectoral ALP Growth

Ifo Institute for Economic Research at the University of Munich German-US Sectoral ALP Growth Contributions, II OTHER, ICT-Using HS, ICT-Using 1996– 2000 HS, ICT-Producing OTHER, ICT-Using HS, ICT-Producing HS, ICT-Using Notes: HS = High-Skill Intensive. Hours reallocation excluded. Sources: EUKLEMS Growth and Productivity Accounts (2008) and IIGAD (2008).

Ifo Institute for Economic Research at the University of Munich German-US Sectoral ALP Growth

Ifo Institute for Economic Research at the University of Munich German-US Sectoral ALP Growth Contributions, III 2001– 2005 OTHER, ICT-Using HS, ICT-Producing HS, ICT-Using Notes: HS = High-Skill Intensive. Hours reallocation excluded. Sources: EUKLEMS Growth and Productivity Accounts (2008) and IIGAD (2008).

Ifo Institute for Economic Research at the University of Munich German-US ICT and High-Skill

Ifo Institute for Economic Research at the University of Munich German-US ICT and High-Skill Complementarities: Contributions to ALP Growth • ICT Capital Deepening and High-Skill Intensity Notes: Hours reallocation excluded. Sources: EUKLEMS Growth and Productivity Accounts (2008), IIGAD (2008) and Eicher and Strobel (2009).

Ifo Institute for Economic Research at the University of Munich German-US ICT and High-Skill

Ifo Institute for Economic Research at the University of Munich German-US ICT and High-Skill Complementarities: Contributions to TFP Growth • Total Factor Productivity (TFP) and High-Skill Intensity Notes: Hours reallocation excluded. Sources: EUKLEMS Growth and Productivity Accounts (2008), IIGAD (2008) and Eicher and Strobel (2009).

Ifo Institute for Economic Research at the University of Munich Industry Contributions to Aggregate

Ifo Institute for Economic Research at the University of Munich Industry Contributions to Aggregate TFP Growth • US–German TFP Contributions (5 -year avg) TFP Contributions GER TFP Contributions US 1992– 1995 1996– 2000 2001– 2005 Energy Mining & Quarrying 0. 04 -0. 03 -0. 02 --- --- Electrical & Optical Equipment 0. 06 0. 28 0. 17 0. 47 0. 76 0. 32 Transport Equipment -0. 03 -0. 07 0. 21 0. 06 0. 16 Manufacturing n. e. c. , Recycling Electricity, Gas & Water Supply -0. 03 -0. 01 0. 11 -0. 02 0. 09 0. 01 0. 03 0. 02 0. 09 0. 04 -0. 01 Transport --- --- -0. 01 -0. 03 0. 10 Communications --- --- 0. 02 -0. 08 0. 27 Financial Intermediation 0. 01 0. 02 -0. 17 -0. 09 0. 32 0. 07 Real Estates 0. 21 -0. 03 0. 14 0. 12 -0. 05 0. 24 Business Activities -0. 22 -0. 58 -0. 37 -0. 06 -0. 26 0. 16 High-Skill-Intensive Industries Goods-Producing Industries: Market Services: Notes: Business Actives comprise: Rental and Leasing Services, Computer and Related Activities, Research and Development and Other Business Services (e. g. legal, accounting, book keeping and auditing services, tax consultancy, market research and public opinion polling, business and management consultancy, architectural and engineering activities, advertising)

Ifo Institute for Economic Research at the University of Munich German-US ICT and High-Skill

Ifo Institute for Economic Research at the University of Munich German-US ICT and High-Skill Complementarities: Fixed-Effects Regressions Energy Mining & Quarryinga) Services Production GER (Ia) US (Ib) GER (IIa) US (IIb) ICT Capital Deepening -0. 0818 0. 0873 -0. 0290 0. 2614** [0. 0604] [0. 1087] [0. 0758] [0. 1019] -0. 1818** [0. 0869] Office Machinery & Comp. 1. 9817*** [0. 0543] 0. 7134*** [0. 1831] -0. 1502 [0. 6517] 2. 7689*** [0. 1243] -0. 4955 [0. 2980] 0. 5342*** [0. 1159] -0. 0842 -0. 0375 [0. 0986] -0. 2505** [0. 1153] 0. 2754 [0. 2092] -0. 4892*** Dep. Var. : ALP Growth High-Skill-Intensive Other Industries Other Elect. Equip. & Instr. b) Transportc) Furniture & Manufact. n. e. c. Electricity, Gas & Water Communicationsc) Financial Intermed. & Insura. Real Estates 0. 4385 [0. 3052] 0. 8479* [0. 4661] 0. 0625 [0. 0778] Production GER (Ia) Services US (Ib) GER (IIa) US (IIb) Non-ICT Capital Deepening 0. 4687*** -0. 0626 -0. 0520 [0. 1160] [0. 2444] [0. 1088] [0. 2763] 1. 1050*** [0. 1425] -0. 7729** -0. 1629 0. 6283** [0. 1156] -0. 4571** [0. 1778] [0. 3634] -0. 1632 [0. 1200] -0. 3358* [0. 1727] [0. 1145] 0. 2473 [0. 2016] 0. 0472 [0. 2694] 0. 5895*** 0. 0353 0. 0913 [0. 0984] [0. 0932] [0. 4893] [0. 1907] 1. 2132*** [0. 1263] 0. 5952*** [0. 1042] 0. 0456 -0. 3707*** 1. 5863*** 0. 8653** [0. 0952] [0. 0937] [0. 4168] [0. 3015] Business Services 0. 0428 -0. 2011* 0. 0632 0. 0058 [0. 0896] [0. 0902] [0. 2177] [0. 1488] Observations 378 224 238 126 Adj. R 2 0. 38 0. 58 0. 24 0. 69 Time Dummies yes yes Notes: Hours reallocation excluded. Sources: EUKLEMS Growth and Productivity Accounts (2008), IIGAD (2008) and Eicher and Strobel (2009).

Ifo Institute for Economic Research at the University of Munich Conclusion • ICT-skill effects

Ifo Institute for Economic Research at the University of Munich Conclusion • ICT-skill effects show stronger contributions to labor productivity in the US, while TFP collapsed strongly in German High-Skill-Intensive services • Evidence for ICT-skill effects in US and German goodsproducing industries and services (e. g. Office Machinery & Computers, Financial Intermediation & Insurance) • But there also ICT effects outside High-Skill-Intensive US industries (e. g. Wholesale and Retail Trade) • German TFP collapse is mainly attributed to skill-intensive Business services • US skill-intensive Business services performed much better post 2000

Ifo Institute for Economic Research at the University of Munich Future Research • ICT

Ifo Institute for Economic Research at the University of Munich Future Research • ICT diffusion and product market regulations (Nicoletti et al. , 2006) • Effects on low- and medium-skilled workers (e. g. job polarization in the US labor market, see Autor, Katz & Kearney, 2006) • Measurement of services output could mask real productivity performance in those sectors

Ifo Institute for Economic Research at the University of Munich Thank You for Your

Ifo Institute for Economic Research at the University of Munich Thank You for Your Attention!

Ifo Institute for Economic Research at the University of Munich Industry Classification, II High-Skilled

Ifo Institute for Economic Research at the University of Munich Industry Classification, II High-Skilled Shares in Total Hours Worked 1 Agriculture, Forestry, Fishing Industry Class Germany 1991– 2005 Industry Class USA 1991– 2005 OTH 3. 44 OTH 14. 66 Goods-Producing Industries: 2 Energy Mining & Quarrying HS 7. 89 OTH 20. 36 3 Food & Tobacco, Textiles OTH 2. 36 OTH 14. 21 4 Other Manufacturing OTH 6. 23 OTH 20. 27 5 Electrical & Optical and Transport Equipment HS 13. 44 HS 30. 88 6 Manufacturing n. e. c. , Recycling; Electricity, HS 7. 89 HS 20. 75 OTH 3. 92 OTH 11. 07 Gas & Water Supply 7 Construction Market Services: 8 Wholesale & Retail Trade, Hotels & Catering OTH 3. 25 OTH 17. 65 9 Transport and Communications OTH 3. 43 HS 21. 36 10 Financial Intermediation HS 10. 05 HS 40. 69 11 Real Estates, Renting and Business Activities HS 13. 88 HS 43. 80 Median 6. 23 20. 36 Mean 6. 89 23. 25 Notes: HS = High-Skill Intensive, OTH = Others; Non-market services are excluded. German WZ 2003 industry classification. US-SIC industry classification. Sources: EUKLEMS Growth and Productivity Accounts (2008) and Eicher & Strobel (2009).

Ifo Institute for Economic Research at the University of Munich Growth Accounting Framework, I

Ifo Institute for Economic Research at the University of Munich Growth Accounting Framework, I • Growth Accounting Approach (Jorgenson und Griliches, 1967; Jorgenson, Ho and Stiroh, 2005), Sectoral Level (i) via Thörnqvist-Index: with , , Value Added Labor Services Capital Services Nominal Factor Income Shares Total Factor Productivity (“Residual“) • Standard Growth Accounting Assumptions: – Constant returns to scale – Perfect competition – Producers behave efficiently

Ifo Institute for Economic Research at the University of Munich Growth Accounting Framework, II

Ifo Institute for Economic Research at the University of Munich Growth Accounting Framework, II • Average Labor Productivity, Industry Level: Value Added per Hour Worked Capital Services per Hour Worked (Capital Deepening) Labor Quality • Average Labor Productivity, Economy Level: – Aggregation Across Industries (Bottom-Up Approach) Hours Reallocation Two-Period Average of Industry Value-Added Share in Total Value Added

Ifo Institute for Economic Research at the University of Munich Literature I • •

Ifo Institute for Economic Research at the University of Munich Literature I • • Acemoglu, D. (1998), “Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality”, Quarterly Journal of Economics, 113, 1055– 90. Acemoglu, D. (2002), “Technical Change, Inequality and the Labor Market”, Journal of Economic Literature, 40, 7– 72. Acemoglu, D. (2009), “When Does Labor Scarcity Encourage Innovation? ”, NBER Working Papers No. 14809. Aghion, P. , E. Caroli and C. García Peñalosa (1999), “Inequality and Economic Growth: The Perspective of the New Growth Theories”, Journal of Economic Literature, 37 (4), 1615– 60. Aghion, P. (2002), “Schumpeterian Growth Theory and the Dynamics of Income Inequality”, Econometrica, 70, 855– 82. Autor, D. H. , L. F. Katz and M. S. Kearney (2006), “The Polarization of the U. S. Labor Market”, NBER Working Paper No. 11986. Bresnahan, T. (1999), “Computerisation and Wage Dispersion: An Analytical Reinterpretation”, Economic Journal, 109, 390– 415. Bresnahan, Timothy, E. Brynjolfsson, and L. Hitt (2002), “Information Technology, Workplace Organization and the Demand for Skilled Labor: Firmlevel Evidence”, Quarterly Journal of Economics, 117 (1), 339– 76.

Ifo Institute for Economic Research at the University of Munich Literature II • •

Ifo Institute for Economic Research at the University of Munich Literature II • • Eicher, T. S. and O. Roehn (2007), “Sources of the German Productivity Demise – Tracing the Effects of Industry-Level ICT Investment”, German Economic Review, 8, 211– 36. Eicher, T. S. and T. Strobel (2008), “Germany’s Continued Productivity Slump: An Industry Analysis”, ifo Working Paper Nr. 58. Eicher, T. S. and T. Strobel (2009), Information Technology and Productivity Growth: German Trends and OECD Comparisons, Cheltenham: Edward Elgar Publishing Ltd. , forthcoming. Griliches, Z. (1969), “Capital-Skill Complementarity”, Review of Economics and Statistics, 5, 465– 68. Hornstein, A. , P. Krusell and G. L. Violante (2005), “The Effects of Technical Change on Labor Market Inequalities”, in P. Aghion and S. Durlauf (eds), Handbook of Economic Growth, Vol. 1, Chapter 20, Amsterdam: North-Holland. Jorgenson, D. W. and K. J. Stiroh (2000) “Raising the Speed Limit: US Economic Growth in the Information Age”, Brookings Papers on Economic Activity, 1, 125– 211. Jorgenson, D. W. , M. S. Ho and K. J. Stiroh (2005), Productivity – Information Technology and the American Growth Resurgence, Vol. 3, Cambridge: MIT Press.

Ifo Institute for Economic Research at the University of Munich Literature III • •

Ifo Institute for Economic Research at the University of Munich Literature III • • Murnane, R. J. , F. Levy and D. Autor (2002), “Upstairs, Downstairs: Computers and Skills on Two Floors of a Large Bank”, Industrial and Labor Relations Review, 55 (3), 432– 47. Nicoletti, G. , P. Conway, D. de Rosa, and F. Steiner (2006), “Product Market Regulation and Productivity COnvergence”, OECD Econonmic Studies N. 43. Oliner, Stephen D. and Daniel E. Sichel (2000), “The Resurgence of Growth in the Late 1990 s: Is Information Technology the Story? ” Journal of Economic Perspectives, 14 (4), 3– 22. Oliner, S. D. , D. E. Sichel and K. J. Stiroh (2007), “Explaining a Productive Decade”, FEDS Working Paper, No. 2007– 63 Stiroh, K. J. (2002), “Information Technology and the U. S. Productivity Revival: What Do the Industry Data Say? ”, American Economic Review, 92 (5), 1559– 76. Stiroh, Kevin J. (2006), “The Industry Origins of the Second Surge of U. S. Productivity Growth”, Federal Reserve Bank of New York, mimeo. Stiroh, K. J. and M. Botsch (2007), “Information Technology and Productivity Growth in the 2000 s”, German Economic Review, 8, 255– 80. Timmer, M. , T. van Moergastel, E. Stuivenwold, G. Ypma, M. O’Mahony, and M. Kangasniemi (2007 a), ‘EU KLEMS Growth and Productivity Accounts, Version 1. 0, Part I Methodology’, March, 2007, available on the internet: http: //www. euklems. net/data/EUKLEMS_Growth_and_Productivity_Accounts_Pa rt_I_Methodology. pdf

Ifo Institute for Economic Research at the University of Munich Literature IV • •

Ifo Institute for Economic Research at the University of Munich Literature IV • • Timmer, M. , T. van Moergastel, E. Stuivenwold, G. Ypma, M. O’Mahony, and M. Kangasniemi (2007 b), ‘EU KLEMS Growth and Productivity Accounts, Version 1. 0, Part II Sources by Country’, March, 2007, available on the internet: http: //www. euklems. net/data/EUKLEMS_Growth_and_Productivity_Accounts_Pa rt_II_Sources. pdf Triplett, Jack E. and Barry P. Bosworth (2004), Productivity in the U. S. Services Sector: New Sources of Economic Growth, Washington, D. C. : Brookings Institution Press.

Ifo Institute for Economic Research at the University of Munich Isolating Industry Productivity Differences

Ifo Institute for Economic Research at the University of Munich Isolating Industry Productivity Differences • Estimation Strategy: ICT and TFP Growth • Description of variables: – – TFP = Total factor productivity k. ICT = ICT capital deepening (spillover effects) HSINT = Dummy for high-skill-intensive industries (j industry groups) D = Time dummy (t years) • Econometric approaches: OLS and fixed effects regressions • Separately estimated for goods producing and services industries (allowing for parameter heterogeneity)

Ifo Institute for Economic Research at the University of Munich Isolating Industry Productivity Differences:

Ifo Institute for Economic Research at the University of Munich Isolating Industry Productivity Differences: TFP Growth (Goods Producing) • TFP Growth Differentials: High-Skill-Intensive vs. Others Total Sample (1991– 2005) ICT Capital Deepening ICT HS Intensive Ind. : Energy Mining & Quarrying Office Machinery & Comp. Other Elect. Equip. & Instr. Transport Furniture & Manuf. n. e. c. Electricity, Gas & Water Observations Adj. R 2 Time Dummies Industry Dummies Leverage Industries excluded Split (>1995) 0. 0090 [0. 0265] 0. 0010 [0. 0261] 0. 0041 [0. 0257] 0. 0150 [0. 0224] -0. 1703 [0. 3517] -0. 0012 [0. 0347] -0. 0798 [0. 1099] 0. 0505 [0. 0681] 0. 2256* [0. 1188] -0. 0748 [0. 0440] -0. 1404 [0. 3558] 0. 0037 [0. 0334] -0. 1358 [0. 1326] 0. 0507 [0. 0718] 0. 2368* [0. 1257] -0. 0936** [0. 0416] ----0. 0179 [0. 0326] -0. 1455 [0. 1306] 0. 0557 [0. 0621] 0. 2402* [0. 1253] -0. 0828* [0. 0434] ----0. 2389*** [0. 0276] -0. 2188 [0. 1402] 0. 1212*** [0. 0409] 0. 2218* [0. 1289] -0. 0372 [0. 0322] 392 0. 10 yes ----- 392 0. 11 yes --- 364 0. 22 yes yes 260 0. 28 yes yes Notes: Significance levels: * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent.

Ifo Institute for Economic Research at the University of Munich Isolating Industry Productivity Differences:

Ifo Institute for Economic Research at the University of Munich Isolating Industry Productivity Differences: TFP Growth (Services) • TFP Growth Differentials: High-Skill-Intensive vs. Others Total Sample (1991– 2005) ICT Capital Deepening ICT HS Intensive Ind. : Financial Intermed. & Insurance Real Estates Business Services Observations Adj. R 2 Time Dummies Industry Dummies Split (>1995) -0. 0157 [0. 0201] -0. 0255 [0. 0330] -0. 0527 [0. 0539] 0. 2126*** [0. 0374] 0. 0520 [0. 0353] 0. 0122 [0. 0270] 0. 1986** [0. 0693] 0. 0585 [0. 0534] 0. 0108 [0. 0447] 0. 1592** [0. 0668] 0. 0759* [0. 0423] 0. 0241 [0. 0557] 238 0. 05 yes --- 238 0. 12 yes 170 0. 14 yes Notes: Significance levels: * significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. – Business Services could not reap productivity gains from ICT • Comprise around 16 percent of market economy value-added • Exhibit strong negative drag on services’ aggregate TFP growth