Economy-Wide and Industry-Level Impact of Information Technology

Abstract

Efforts by economists to measure the contribution to output growth of investment in information technology (IT) equipment have proven inconclusive, and studies of the productivity of IT workers are relatively scarce. In the present study, we attempt to fill this gap in our understanding of the impact of IT capital and labor in the production process. We use industry data to extend the previous studies in three ways: 1) by using more recent data (1983 to 1993); 2) by covering manufacturing and non-manufacturing industries, including services; and 3) by treating IT workers and non-IT workers as two distinct categories of labor. We adopt a log-linear production function approach, usually used in conjunction with company data, but apply the model to industries. We first estimate the model for the aggregate economy by pooling eleven cross-sections for 58 industries after establishing that elasticities are invariant over 1983 to 1993. We find that all the economy-wide elasticities are positive and lie between zero and one, consistent with a priori expectations. Also, the sum of the elasticities is about 0.9, implying decreasing returns to scale. In the time-series analysis, the results focus on each of the 58 industries separately. For two-thirds of these industries, the estimated elasticities are non-negative with respect to IT equipment; for ten of them, marginal returns to IT equipment are statistically significant and quite high, with nine exhibiting annual rates of return in excess of 100 percent. Not surprisingly, average returns to IT investment for the entire economy and most of the major industry sectors are not only lower, but also more plausible, a consequence of averaging the diverse results from component industries. We obtain similar results in the case of IT labor. Two-thirds of all industries show non-negative elasticities, with ten showing statistically significant positive coefficients. In five of these industries, both the IT capital and the IT labor coefficients are positive and significant. Though the marginal products derived from the estimated coefficients seem inexplicably high, especially for IT workers, they suggest that the returns to IT labor are quite large in some industries. Marginal products estimated for the entire economy and for major industrial sectors, such as manufacturing and non-manufacturing, however, fall within plausible ranges.

JEL Classification: E23, O33