FRBSF Economic Letter
2004-07; March 12, 2004
Technology, Productivity, and Public Policy
CSIP Notes appears on
an occasional basis. It is prepared under the auspices
of the Center for the Study of Innovation and Productivity
within the FRBSF's Economic Research Department.
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This Economic
Letter summarizes papers presented at the conference "Technology,
Productivity, and Public Policy" held at the Federal Reserve
Bank of San Francisco on November 7-8, 2003. The conference was
the inaugural event of the new Center for the Study of Innovation
and Productivity (CSIP), which is organized within the Economic
Research Department of the Bank.
The study of
productivity growth cuts across many of the fields and approaches
in economics—microeconomics, macroeconomics, and
international economics; theoretical and empirical analyses—and
it is a subject for students of history as well as of current events.
The seven papers presented at this conference highlight the breadth
of questions and methodologies of recent research on productivity
growth.
Three of the conference papers examine productivity growth
at the macro economic level. Kahn and Rich propose a method that
aims
to improve our ability to identify breaks in trend productivity
growth of the types that occurred in the 1970s and in the mid-1990s.
While such breaks are easy to spot after the fact, they have
proven difficult to recognize in real time. In a theoretical paper,
Jones
asks how production technologies are determined in the first
place. He considers how new ideas affect the development of production
possibilities in both the short run and the long run. Manuelli
and Seshadri consider the link between innovations and the adoption
of new production technologies directly. As a case study of technological
diffusion, they examine the long time lag between the invention
of the farm tractor and its wide adoption on American farms in
the first half of the 20th century.
Two of the papers take a
more microeconomic approach. In a theoretical paper, Scotchmer
discusses when and why countries engage in intellectual
property rights treaties and whether such treaties produce
the optimal amount of innovative activity. Lach and Schankerman
focus
on whether university researchers respond to financial incentives
when determining the effort they expend generating inventions.
On the basis of these results, they discuss how universities
might alter the current compensation system to produce more
innovative effort.
The final two papers look at how technology
and productivity differentially affect countries and individuals.
Considering
productivity in an
international framework, Hsieh and Klenow examine the extent
to which differences in the efficiency of producing investment
goods
can explain low rates of capital investment in poor countries.
Autor, Levy, and Murnane use an array of data and statistical
analyses to tie down the relationship between increased computer
use in
the workplace and the demand for skilled labor. They identify
tasks for which computers can substitute for workers and
tasks for which
computers complement worker skills. They use their results
to shed light on the changing relative demand for skilled
workers in the
U.S. over the last 30 years.
Detecting changes in trend productivity growth
Shifts in trend
productivity growth are uncommon and difficult to recognize when
they are actually occurring. Kahn and Rich
propose and estimate a statistical model in which the rate of
trend productivity growth unpredictably switches from a "low-growth" to
a "high-growth" regime. Their econometric procedure
detects a regime shift from high growth to low growth in the
early 1970s, followed by a shift back to high growth in the late
1990s, with the difference between the mean annual growth rates
in the two regimes of about 1.5 percentage points. They find
that the economy tends to stay in one regime or another for about
20 years on average.
A key assumption of their method is that
a common trend underlies long-run movements in real wages, consumption,
and productivity.
They further assume that this common trend undergoes infrequent
shifts between the two growth rate regimes. Because we cannot directly
observe which regime the economy is in at any point in time, it
must be estimated along with other parameters of their model. They
find that estimating a common permanent trend across all three
variables does a better job of detecting trend shifts in U.S. data
than do methods that are based only on productivity data. They
also find that their procedure identifies shifts in regime relatively
quickly.
New perspective on production functions
Jones studies how the creation
of new "ideas" affects
the use of technology and productivity in the economy. In his model,
research is directed at finding new ways to produce goods, and
the resulting stream of innovations shapes the evolving aggregate
production technology that relates inputs of capital and labor
to output. At any point in time, producers choose from the available
set of production technologies based on the relative costs of inputs.
Over time, better ideas are created and the production possibilities
frontier shifts out.
This model provides innovation-based microeconomic
foundations for a long-run production function of the Cobb-Douglas
form that
has been widely used in the economics literature and has empirically
supported long-run properties. Importantly, Jones's model implies
a stable steady state with positive growth, even in the presence
of falling relative prices of capital goods, a property that
many other production functions fail to possess.
But, the standard
Cobb-Douglas function also has some shortcomings at explaining
short- and medium-run empirical regularities, which
the Jones model has the potential to correct. For one, the
Cobb-Douglas model implies that the share of income going to labor
is constant
over time; but, the empirical evidence, especially from European
economies, suggests that this may not be the case, and the
Jones model does not impose this restriction. Second, the Cobb-Douglas
model implies that capital and labor are just as substitutable
in the short run as in the long run. In contrast, the evidence
suggests that the degree of substitutability of labor and capital
is lower in the short run, a feature also consistent with the
Jones model.
Technological diffusion
Manuelli and Seshadri look at one important
example of innovation, the tractor. They argue that the gradual
diffusion of tractor
use on U.S. farms from 1900 to 1960 can be explained by
technological improvements in tractor design and by the path of
real wages
during
this period. Empirical studies of the diffusion of new
technologies have documented that there can be a long time lag
between
the introduction of a new technology and its wide adoption.
Other
researchers have
argued that there are many impediments to the immediate
adoption of new and more productive technologies; in contrast,
this
paper aims to explain the slow diffusion in the case of
tractors without
relying on such frictions.
They find that low farm wages
through the 1930s reduced the incentive for farmers to switch
from horses to tractors
during
that period.
Real farm wages fell by half during the Great Depression,
which further slowed the adoption of tractors on American
farms.
It was not until the 1940s, when wages experienced rapid
growth that tractors
become widely adopted. In addition, increases in urban
wages during this period caused less-skilled farmers
to leave the
agricultural
sector and, as a result, the average skill of the remaining
farmers improved over time. This resulted in concentrations
of land in
favor of larger-sized farms, which also made the adoption
of tractors
more profitable. Finally, they find that improvement
in the quality of tractors over time, especially after the
1940s,
played an
important role in encouraging the adoption of tractors.
Intellectual
property treaties
In 1995 the World Trade Organization passed
the Agreement on Trade Related Aspects of Intellectual Property
(TRIPS)
which
set minimum
standards for intellectual property rights protections
across countries. Scotchmer considers whether the
extension of minimum
intellectual
property rights, like those embodied in TRIPS, produces
socially efficient outcomes. Specifically, she asks
whether intellectual
property agreements improve consumer welfare by enhancing
the cross-border exchange of ideas. Scotchmer addresses
this question
by developing
a theoretical model of bilateral intellectual property
rights treaties and then investigating the circumstances
under which
countries
enter or do not enter agreements.
She finds that
countries may not independently engage in the socially optimal
level of intellectual property
rights.
For
example, when
countries are not the same size or have different
levels of innovativeness, the desire for intellectual
property
protections may differ,
with smaller or less-innovative countries wanting
fewer protections. In such cases, harmonization
policies, such as TRIPS, can
improve
social efficiency by increasing protections that
fuel
innovative activity.
Incentives and inventions
in universities
Lach and Schankerman examine whether university
researchers respond to financial incentives
when determining
their innovative effort.
Specifically, the authors ask whether academic
researchers would create more and/or higher
quality inventions
if they were allowed
to keep a larger share of the revenues generated
from licensing the new technologies. The authors
set up
a simple model
of the research effort decision of academic
scientists that
allows scientists
to direct effort toward creating a greater
number of inventions or a higher quality of invention.
Taking this
model to the data, they find that scientists do respond to financial
incentives,
but only on
the quality component
of
their effort decision. Scientists who were
permitted to keep the largest
share of royalties generated the highest
quality inventions, all else equal. Financial incentives
had no measurable
impact on the
number of inventions scientists created.
Lach and Schankerman also found that the relationship
between
royalty share
and invention quality was strongest at private
universities. With this in mind,
they support greater financial remuneration
for scientists contributing to the innovative
process.
Relative prices and relative prosperity
Hsieh and Klenow examine
a well-established relationship between countries' per capita
incomes and investment
rates in physical
capital (equipment, buildings, etc.),
evaluated at international prices. The standard story
suggests that poor countries
have lower purchasing power parity (PPP)
investment rates than
rich countries
because poor countries have low savings
rates, due
to high tax rates, etc. Hsieh and Klenow
argue against this
explanation.
Using a theoretical model and the predictions
from it, they examine
an
array of nonpolicy alternatives to explain
differences in investment across countries.
First,
the authors show that investment rates in poor countries only
appear low
when evaluated
at
international
prices;
when valued in the country's own currency,
poor countries save
and invest at
the same rate as rich countries. Second,
they argue that the low PPP investment
rates in
poor countries
are not
due to low
savings
rates or to high tax rates or tariffs
on investment, but rather owe to low
efficiency
in poor countries
in producing
investment
goods or exports that can be traded
for investment goods.
Skill levels and technological change
Autor, Levy, and Murnane
examine the impact of workplace computer use
on the demand
for different
types of
workers. They detail
what computers are used for and
how they substitute for or complement
various worker skills. Specifically,
they
distinguish
between
routine
cognitive or manual tasks that
can be
performed by following a set of
rules and nonroutine
problem-solving and communication
tasks
that require situational thinking
and decisionmaking; computers replace the
former and complement
the latter.
They use
their measure of job content and
data on increasing computer use
over time to
explain the rising demand for college-educated
workers between 1960 and 1998.
They
find a strong relationship between shifts in job tasks and the
adoption
of computer
technology over
the period;
specifically, increased computerization
reduced labor
input for routine tasks
and increased labor input for
nonroutine tasks. This pattern occurred both
within and across
industries and occupations.
Based
on these
calculations, they argue that
nearly two-thirds of
the relative increase in demand
for college-educated workers
can be explained
by rising workplace computer
use. Interestingly, they find that about
half of the measured
impact of rising
workplace
computer
use owes to increasing requirements
within occupations over time;
for example, the
tasks and requirements
for a secretarial
job
in 1998 involved a much higher
level of skills than a secretarial
job
in 1960, contributing
to higher
demand for skilled
workers in the latter period.
Mary Daly
Research Advisor |
John Williams
Senior Research Advisor |
Conference Papers
Papers are available in pdf format at http://www.frbsf.org/economics/conferences/0311/index.html
Autor, David, Frank Levy, and Richard Murnane.
2003. "The
Skill Content of Recent Technological Change: An Empirical Exploration." Massachusetts
Institute of Technology.
Hsieh, Chang-Tai, and Peter Klenow. 2003. "Relative Prices
and Relative Prosperity." Stanford University.
Jones, Charles. 2003. "Growth, Capital Shares, and a New Perspective
on Production Functions." University of California, Berkeley.
Kahn, James, and Robert Rich. 2003. "Tracking the New Economy:
Using Growth Theory to Detect Changes in Trend Productivity." Federal
Reserve Bank of New York.
Lach, Saul, and Mark Schankerman. 2003. "Incentives and Invention
in Universities." London School of Economics.
Manuelli, Rodolfo, and Ananth Seshadri. 2003. "Frictionless
Technology Diffusion: The Case of Tractors." University of
Wisconsin, Madison.
Scotchmer, Suzanne. 2003. "The Political Economy of Intellectual
Property Treaties." University of California, Berkeley.
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