Recent Working Papers: Defining and Measuring Productivity in the New Economy

It is widely argued in the tech-based economic development community that New Economy businesses, specifically computers and information technology, account for the tremendous economic growth of the last half of the 1990s. But does the data support this?

A look at productivity growth may help to answer the question. Productivity growth is seen as a measure of progress: increases in productivity are often associated with improvements in the nation’s economy and society’s general welfare. William Nordhaus, Professor of Economics at Yale University, has written a series of three papers exploring the measurement of productivity and growth, with particular attention to the contributions of the New Economy sectors. In the first, Alternative Methods for Measuring Productivity Growth, Nordhaus argues the link between productivity growth and economic welfare is not clear. Traditional measures of productivity growth do not reflect improvements in the economic welfare of society. He breaks down the current economic formulae used for measuring productivity growth and closes with an alternative theoretical measure which he argues more closely serves as a productivity-welfare index.

In New Data and Output Concepts of Understanding Productivity Trends, Nordhaus  presents a new measure of industrial productivity that draws from income-side data published by the Bureau of Economic Analysis. He then develops the data set and  accounts to apply the new measure to the traditional economy and the New Economy, which is defined as industrial sectors including machinery, electric equipment, telephone and telegraph, and software (limitations of this definition are explored). A discussion follows of using the data in three output concepts which can be applied in productivity studies: gross domestic product (income-based), the business sector output concept defined by the Bureau of Labor Statistics (output based), and a third, new output measure, “well-measured output.” The third concept looks at those industry sectors that have relatively accurate measures of output: agriculture, forestry and fishing; mining; manufacturing; transportation and public utilities; wholesale trade; and retail trade.

In Productivity Growth and the New Economy, Nordhaus presents the findings from his application of the theoretical productivity measure defined in the first paper to the new income-side data set developed in the second paper. He concludes:

• the new welfare-theoretic measure of productivity growth defined in the first paper revealed productivity growth to be, on average, 0.2 percent higher per year than other measures;
• the New Economy sectors have made “a significant contribution” to economy-wide productivity growth (accounting for approximately one-third of the labor-productivity growth of the business sector); but that
• labor-productivity growth is not limited to the New Economy sectors;
• there has been a “major acceleration” in all labor productivity during the most recent three years (1996-98) relative to the previous 20 years (ranging from 1.2 -2.1 percent, depending on the output concept applied); and
• manufacturing electric and non-electric machinery (which includes computers and semiconductor manufacturing) were the leading contributors
• of the New Economy’s contribution to productivity growth – accounting for 25 percent of all GDP productivity growth in 1996-1998.

All three working papers by Nordhaus can be purchased from the National Bureau of Economic Research at http://www.nber.org