FRBSF Economic Letter
2002-34; November 15, 2002
Riding the IT Wave: Surging Productivity Growth in the West
The Regional Report appears on an occasional basis. It is prepared under
the auspices of the Financial and Regional Analysis Section of the FRBSF's
Economic Research Department.
U.S. productivity growth surged in the latter half of the 1990s after
nearly two decades of lackluster gains. Several states in the West were
among the leaders in this productivity growth surge, posting average annual
increases well above the rest of the U.S. In the last Economic Letter
Dan Wilson examined the District's productivity performance advantage
in terms of the level of output per worker. This Economic Letter documents
the recent productivity performance in terms of growth rates and examines
the sectors contributing to the West's exceptional surge. The results
show that, as in the nation, productivity growth in the District accelerated
in most regions and sectors. In terms of outperforming the rest of the
nation, however, much of the credit goes to the relatively rapid productivity
growth in sectors related to information technology (IT).
Productivity surge stronger in the District
From 1995 to 2000, output per worker in the U.S. grew at an average annual
rate of about 2.8%, well above the 1.5% per year pace recorded from 1973
to 1995. A large literature links this surge to improvements in producing
and using IT goods and services (Oliner and Sichel 2002; Stiroh 2002).
Less well-studied is the extraordinary surge of productivity growth in
the West, where both the pace of growth and the acceleration in growth
exceeded that of the rest of the nation.
The magnitude of the West's advantage is illustrated in Figure 1, which
shows average annual growth in productivity (measured as real value-added
per worker) in the Twelfth District and the rest of the nation from 1986-1994
and 1995-2000 (see Wilson 2002 for a detailed description of the measurement
of regional productivity; 1986 is the first year in which these data are
reliable). As the figure indicates, in the earlier period, productivity
growth in the District about matched that in the nation. But from 1995
through 2000, productivity grew much faster in the District3.5%than
in the rest of the nation2.6%. Furthermore, during the latter period,
the exceptional performance was widespread, with six of the nine District
states outpacing the average for the rest of the U.S. Among these six
states, average annual productivity growth ranged from 6.8% in Oregon
to 2.8% in Utah. In contrast to the trends in the rest of the District
and the nation, productivity growth slowed in Alaska, Hawaii, and Nevada
during this period.
Another way to consider the exceptional productivity growth rates in
the District is to compare the increase between the periods 1986-1994
and 1995-2000. By this measure, productivity growth in the District jumped
by 2.1 percentage points, while in the rest of the nation the jump was
1.5 percentage points. Ranked by the magnitude of the productivity acceleration
across periods, the District included five of the top eleven states in
the nationOregon (1st), Idaho (2nd), Utah (4th), Washington (9th),
and Arizona (11th). Other states in the top ten list included Minnesota,
North Dakota, North Carolina, Colorado, New Hampshire, and South Dakota.
One factor contributing to the faster acceleration of productivity growth
in the District was the shift in certain District states from low-wage,
resource-based industries, like logging and wood processing, to high-wage
sectors, like IT manufacturing and software development. The impact of
these shifts is evident in Figure 1, as states that made the shiftOregon,
Idaho, and Utahalso showed the most pronounced accelerations in
productivity growth. In Oregon, productivity growth increased from an
average annual rate of 0.3% from 1986-1994 to 6.8% from 1995-2000, a jump
of 6.5 percentage points. The jumps in Idaho and Utah also were large3.8%
and 2.9%, respectively.
Broad-based surge, focused advantage
A great deal of the productivity acceleration in the U.S. in recent years
appears to be due to improvements in producing IT services and goods.
But, as Figure 2 shows, the gains have not been limited to IT services
(which includes business services) and IT manufacturing (which includes
industrial machinery and equipment, electronics, communications equipment,
and instruments and related products). Rather, the productivity surge
was broad-based in both the District and the rest of the nation. This
supports the many anecdotes about rapid improvements in efficiency associated
with increased and better use of IT in sectors as diverse as agriculture
and retail trade.
For example, in keeping with reports of technology-driven improvements
in genetic engineering and crop management, agricultural productivity
increased sharply during 1995-2000, rising by 3.2 percentage points outside
of the District and 4.3 percentage points in District states. Rapid accelerations
in productivity growth also were recorded in wholesale and retail trade,
where investments in IT equipment and software helped firms better manage
inventories, access customers, and maintain records. Gains in these sectors
were roughly the same in the District and the rest of the nation. Only
mining, construction, and transportation, communications, and public utilities
(not shown) recorded declines in productivity relative to the previous
Productivity gains between the two periods were more regionally varied
in the finance, insurance, and real estate (FIRE) sector. Outside the
District, they increased by 3 percentage points on an annual average basis,
about the same jump as wholesale trade, but within the District they jumped
by only 1.4 percentage points. Again, gains in productivity in FIRE are
consistent with anecdotal reports of the computerization of banking, investment,
and real estate markets. The District outperformed the rest of the U.S.
in the non-IT durable manufacturing and non-durable manufacturing sectors.
As expected, productivity growth also jumped in IT services and IT manufacturing,
especially in the District. Productivity growth in District IT services
increased by 1.4 percentage points to a 3.3% average annual rate of growth,
while in the rest of the nation, it rose only slightly. In keeping with
rapid technological advancement in the production of semiconductors and
computers, productivity growth in IT manufacturing surged in the latter
half of the 1990s, especially in the Twelfth District. Outside the District,
average annual productivity growth accelerated by about 4.5 percentage
points between the two periods, and within the District, it doubled.
This analysis helps answer two questions: Is the productivity surge in
the District sustainable? And will the District continue to outperform
the rest of the nation? The answer to the first question appears to be
"yes." Because the District's productivity surge occurred across
a wide variety of industries, this suggests that the District's productivity
surge does not hinge on the performance of just one sector, a fact likely
to increase the probability that it will be sustainable. The answer to
the second question appears to be less positive. That is, it is less likely
that the District's productivity growth will continue to outperform the
rest of the nation's because the star performersagriculture, durable
and nondurable manufacturing, IT manufacturing and IT servicesconstitute
a limited set of industries.
How important is IT?
While data limitations make it difficult to assess accurately the contributions
of IT use on District productivity growth, it is possible to examine the
impact of IT-producing sectors on the pickup in District productivity
growth and on the region's strong performance relative to the nation.
A simple way to estimate the impact of the IT sector on District productivity
growth is to remove the IT sector from the productivity growth calculation
and compare the result to the actual. The way to examine the importance
of IT-producing sectors on the District's productivity advantage is to
assign the productivity growth rate in IT for the rest of the nation to
the District and compare the result to the actual.
Panel A of Figure 3 addresses the first point. It shows that, absent
the IT sector, average annual productivity growth in the District for
the period 1995-2000 would have been about 1 percentage point below the
actual value2.5% instead of 3.5%. By this measure, about one-third
of the District's productivity surge is due to rapid gains in the IT sector.
Although measured differently, this is about the same contribution Stiroh
(2002) finds for IT-producing sectors. This exercise implies that, absent
the IT sector, the District's productivity growth advantage in the latter
half of the 1990s would be eliminated, with gains again mirroring those
in the rest of the U.S.
Panel B of Figure 2 addresses the second point. The first bar shows what
District productivity growth would have been if its IT-producing sectors
had experienced productivity growth comparable to the rest of nation.
Erasing the relatively rapid productivity growth in District IT sectors
reduces but does not eliminate the District's overall productivity advantage
for the period. In this scenario, District productivity would have averaged
2.9% instead of the actual 3.5%. Thus the IT sector accounted for 0.6
percentage points (two-thirds) of the 0.9 percentage point productivity
growth gap between the District and the rest of the nation during the
period 1995 through 2000. The remaining advantage is due to the more rapid
productivity growth in other sectors, including agriculture and non-IT
The U.S. economy's remarkable surge in productivity growth since the
mid-1990s was especially strong in the Twelfth District. Relatively rapid
productivity growth in recent years stretched the District's long-standing
productivity level advantage and boosted profits and wages across the
region. Looking forward, the broad-based nature of the District's productivity
surge across sectors and states suggests that the more rapid growth trend
is unlikely to be derailed by disruptions in a single industry or weakness
in a single state. At the same time, with so much of the District's extraordinary
performance concentrated in a few industries, especially IT, its productivity
growth advantage is more vulnerable, particularly in the current IT climate.
Oliner, S., and D. Sichel. 2002. "Information
Technology and Productivity: Where Are We Now and Where Are We Going?"
Federal Reserve Board FEDS Paper 2002-29.
Stiroh, K. Forthcoming. "Information Technology and the U.S. Productivity
Revival." American Economic Review.
Wilson, D. 2002. "Productivity
in the Twelfth District." FRBSF Economic Letter 2002-33