July 2, 2001

NOTE TO EDITORS

Investing in Information Technology: Productivity Payoffs for U.S. Industries, the latest edition of the New York Fed's Current Issues in Economics and Finance, is enclosed for your review.

Using industry-level data, senior economist Kevin Stiroh provides strong evidence that information technology (IT) contributed significantly to the U.S. productivity revival of the late 1990s. Stiroh shows that the industries experiencing the largest productivity acceleration during this period were the producers and most intensive users of information technology.

Stiroh's findings counter the argument of the "IT skeptics," who maintain that the surge in aggregate productivity at the end of the last decade can be traced largely to the narrow group of industries that actually manufacture computer hardware and to the strength of the economy. By contrast, Stiroh contends that a broad spectrum of industries—those who use information technology intensively as well as those who produce it—have driven the productivity revival.

To assess the breadth of the revival, Stiroh uses 1987-99 output and employment data from the Bureau of Economic Analysis to construct a measure of labor productivity for the ten broad sectors of the U.S. economy and their sixty-one constituent industries. He then compares productivity growth for the 1987-95 period with productivity growth for the 1995-99 period. His results indicate that all of the principal sectors and a majority of individual industries experienced accelerating productivity growth after 1995.

To determine whether these productivity increases were linked to IT investment, Stiroh first calculates the current dollar share of IT capital in total reproducible, nonresidential assets for each of the ten sectors and sixty-one industries. After separating out the two industries that produce IT equipment, he uses the IT capital share to divide the remaining industries into those that use IT intensively (defined as industries with an IT capital share above the 1995 median) and all others.

The author then relates the observed differences in IT capital shares to differences in productivity growth. The greatest acceleration in productivity growth—3.7 percentage points—was achieved, as one would expect, by the IT-producing industries. The industries that use IT intensively, however, also realized substantial productivity gains. The mean productivity acceleration for this group was 2.0 percentage points—considerably greater than the 0.4 percentage point acceleration shown by other industries. "These results," the author notes, "suggest an important link between IT use and productivity gains."

Contact: Peter Bakstansky or Steven Malin