Industry Analysis
Understanding why productivity growth in the United States has increased requires knowing what factors in the economy have changed. The most of the recent increase came about through greater capital deepening and efficiency gains. What the chart did not tell us is why businesses increased their rates of capital investment to bring about capital deepening and why efficiency gains have been higher in the past decade than they were for much of the previous two decades.
Productivity growth for the economy as a whole comes from investment and innovation in a wide variety of businesses. A lot can be learned about the sources of growth by looking at which kinds of investments have grown most quickly, as well as which industries have had the fastest productivity growth. The average rate of productivity growth hides substantial differences across industries. In particular, the surge in productivity in the late 1990s appears to be a story of growth in industries making and using IT capital. The efficiency growth since 2000 has been particularly strong in the high-tech sector, but that it has also been strong in the distribution sector, which includes retail and wholesale trade, transportation, and warehousing. Finance and business services also showed strong efficiency growth and hence strong productivity growth. Manufacturing, which has made small investments in IT capital compared to the other sectors shown, has had the slowest recent growth in efficiency.
The strong productivity growth in the distribution and financial services sectors highlights one of the most striking differences between the pre- and post-1995 periods. From the 1970s through 1995, productivity growth in goods-producing industries was generally greater than that in service-providing industries. However, since 1995, productivity growth in service-providing industries has exceeded the growth in goods-producing industries (such as manufacturing).
Given this difference, one of the most important insights into the recent period of productivity growth comes from understanding why service-sector productivity growth accelerated after a long period of slow growth. As discussed above, capital deepening and efficiency growth accounted for most of the acceleration of productivity growth for the U.S. economy as a whole over the last decade.
In examining productivity growth rates over the recent period, researchers have found it useful to characterize investments by whether they involve a purchase of IT equipment, which is usually defined as computer hardware, software, and telecommunications equipment.