Is the 21st Century Productivity Expansion Still in Services? And What Should Be Done About It?

January 6, 2007

The 20th century ended with an unexpected surge in U.S. productivity growth. The 21st century has opened with another. Labor productivity grew two and a half percent per year during 1995-2000, nearly double its growth rate over the previous two decades, and has exceeded three percent per year since 2000, in Bureau of Labor Statistics data.

In Triplett and Bosworth (2006), Bosworth and Triplett (forthcoming) and Triplett and Bosworth (2004),2 we advanced an interpretation of the post-1995 U.S. productivity expansion that differed in several respects from previous research (Oliner and Sichel, 2000; Jorgenson, Ho and Stiroh, 2000; and Gordon, 1999). Earlier studies focused on impressive multifactor productivity (MFP) growth in computer and semiconductor production, its resulting feedback into information technology (IT) investment in the rest of the economy, and the subsequent labor productivity (LP) growth in “IT-using” industries because of IT capital deepening.

Unlike previous researchers, we examined productivity in services industries. The post-1995 IT investment boom did create a capital deepening effect on services industry LP (IT investment goes overwhelmingly to services industries). In this, our services industry results parallel aggregate results of others.

We also showed that strong MFP growth in the services sector transformed American economic performance after 1995. During the previous (1973-1995) years of slow aggregate productivity growth, the services industries were marked by productivity stagnation, in both LP and MFP, as Griliches (1992, 1994) pointed out. After 1995, services productivity accelerated strongly. In the revised Bureau of Economic Analysis/ Bureau of Labor Statistics (BEA/BLS) data used for this paper, services sector LP and MFP growth rates more than doubled after 1995 (Table 1). Services sector acceleration substantially exceeded the more modest productivity accelerations in the goods-producing sector.