ICT, SKILLS AND GERMAN INDUSTRY PRODUCTIVITY

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ICT, SKILLS AND GERMAN INDUSTRY PRODUCTIVITY
The Interdependency of High-Skilled Labor and ICT
Investments

• Thomas Strobel
• The 2008 World Congress on National Accounts and
  Economic Performance Measures for Nations,
  Washington D.C., 05-15-2008

2
Motivation

• Labor productivity growth
• US experienced two productivity surges 1995
  2000
• Germany experienced dual productivity declines
• Sources of US productivity surges
• ICT-producing and -using industries (e.g. Stiroh,
  2002 Stiroh Botsch, 2007)
• Germany
• Much weaker ICT (using/producing) effects, unable
  to offset demise of other industries (Eicher
  Roehn, 2007, Eicher Strobel, 2008)

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Motivation

• What if we look at the interaction of ICT and
  skills? What can we learn about German industry
  performance and productivity contributions?
• Capital-skill complementarity Griliches (1969)
• ? extended to ICT capital-skill complementarity
  (e.g. Brynjolfsson et al., 2002)
• Skill-biased technological change (e.g. Acemoglu,
  1998, 2002, Aghion, 2002, and Hornstein et al.
  2005, OMahony et al., 2002)
• Focus High-skill intensity of industries
• Share of high-skilled hours worked in total hours
  worked (? EU KLEMS)
• High skilled university graduates
• Available for 14 industries, higher aggregates
  are imputed at lower sectoral levels of
  aggregation
• Industry classification High-skill-intensive are
  those who are above the median

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Growth Accounting Databases German Capital
Accounts
Ifo Database Groningen Database EU KLEMS Database
52 industries (19912005) 26 industries (19802003) 66 industries (19702005)
3 ICT assets Software investments based on Ifo studies/surveys Communications Equip. Computers and Office Equip. Investments 3 ICT assets Software imputed by other countries shares in IT equipment Communications Equip. Computers investments only 3 ICT assets Software based on estimates by the German Institute of Economic Research Communications Equip. Computing investments only
9 Non-ICT assets 3 Non-ICT assets 5 Non-ICT assets
ICT price adjustments Groningen ICT price deflators (based on BEA) ICT prices based on BEA price deflators ICT prices provided by Federal German Statistical Office

• Ifo Productivity Database (Roehn et al., 2007,
  available at http//faculty.washington.edu/te/grow
  thaccounting/) Software investment shares in
  intangible assets and industry-level software
  investment based on Ifo study (Hermann and
  Mueller, 1997) and additional surveys conducted
  by the Ifo Investment Survey (1998, 1999, 2000).
• Ifo Investment Survey Follows the EU guidelines
  for harmonized business surveys (contains 70,000
  German firms). It is established as an excellent
  leading indicator of German investment and is
  also incorporated in a number of other leading
  indicators (e.g. European Commissions Economic
  Indicators of the Euro Zone).

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Disaggregating German Labor Productivity Growth
Accounting (Jorgenson, Stiroh, and Ho, 2005)
1991 1995 1991 1995 1996 2000 1996 2000 2001 2005 2001 2005
Market Economy Labor Productivity Growth (Value-Added) 2.54 100 2.31 100 1.94 100
Contributions to Market Economy Labor Productivity Contributions to Market Economy Labor Productivity Contributions to Market Economy Labor Productivity
Labor Quality Growth .28 11 .15 7 .23 12
Hours Reallocation .96 38 .76 33 .28 14
Capital Deepening 1.05 41 .81 35 .97 50
ICT Capital Deepening .26 10 .36 16 .24 12
Non-ICT Capital Deepening .79 31 .45 20 .73 38
Total Factor Productivity Growth .26 10 .58 25 .46 24

• General productivity decline in 19912005 (Eicher
  Roehn, 2007)
• Decline in hours reallocation
• Steady capital deepening
• Weaker TFP growth post 2000

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Disaggregating Labor Productivity ICT Capital
DeepeningAccounting for High-Skill Intensity
1991 1995 1991 1995 1996 2000 1996 2000 2001 2005 2001 2005
Market Economy Labor Productivity Growth (Value-Added) 2.54 100 2.31 100 1.94 100
Contributions to Market Economy Labor Productivity Contributions to Market Economy Labor Productivity Contributions to Market Economy Labor Productivity
ICT Capital Deepening .26 10 .36 16 .24 12
High-Skill-Intensive Industries .08 3 .21 9 .14 7
High-Skill-Intensive Goods Prod. .03 1 .04 2 .01 1
High-Skill-Intensive Services .05 2 .17 7 .13 7
Other Industries .18 7 .15 7 .10 5

• ICT Capital Deepening
• ICT capital deepening in other industries
  declined, high-skill intensive industries highest
  during 19962000
• ICT capital deepening strongest in
  high-skill-intensive services throughout all
  periods

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Disaggregating Labor Productivity Total Factor
Productivity Accounting for High-Skill Intensity
1991 1995 1991 1995 1996 2000 1996 2000 2001 2005 2001 2005
Market Economy Labor Productivity Growth (Value-Added) 2.54 100 2.31 100 1.94 100
Contributions to Market Economy Labor Productivity Contributions to Market Economy Labor Productivity Contributions to Market Economy Labor Productivity
Total Factor Productivity .26 10 .58 25 .46 24
High-Skill-Intensive Industries .04 2 -.29 -13 .03 2
High-Skill-Intensive Goods Prod. .03 1 .30 13 .43 22
High-Skill-Intensive Services .01 0 -.59 -26 -.40 -21
Other Industries .22 9 .87 38 .43 22

• Total Factor Productivity
• TFP growth quite low in high-skill-intensive
  industries due to weak performances of services
  industries
• TFP divergence in high-skill-intensive
  manufacturing and services sectors post 1995
  (bifurcation into positive and negative TFP
  growth contributions)

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Disaggregating Labor ProductivityAccounting for
High-Skill Intensity

• Descriptive trends
• High-skill-intensive industries
• Higher ICT capital deepening, but
• lower TFP growth, especially due to services
• Other industries
• Falling ICT capital deepening and
• stronger TFP growth during 19952000, but weaker
  again post 2000
• Formal testing (on a more disaggregate level)
• Are there statistically significant differences
  from ICT capital deepening on productivity growth
  for high-skill-intensive compared to other
  industries?
• Econometric testing approaches

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Isolating Industry Productivity Differences

• Estimation Strategy for Total Factor Productivity
  Growth
• Description of variables
• TFP Total factor productivity
• kICT ICT capital deepening (spillover effects)
• HSINT Dummy for high-skill-intensive industries
  (j industry groups)
• D Time dummy (t years)
• Econometric approaches OLS and fixed effects
  regressions
• Separately estimated for goods producing and
  services industries (allowing for parameter
  heterogeneity)

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Isolating Industry Productivity DifferencesOLS
and Fixed Effects TFP Growth (Goods Prod.)

• TFP growth differentials High-skill intensive
  and other industries

Total Sample (19912005) Total Sample (19912005) Total Sample (19912005) Split (gt1995)

ICT Capital Deepening 0.0090 0.0010 0.0041 0.0150
  0.0265 0.0261 0.0257 0.0224
ICT ? HS Intensive Ind.
Energy Mining Quarrying -0.1703 -0.1404 --- ---
  0.3517 0.3558 --- ---
Office Machinery Comp. -0.0012 0.0037 0.0179 0.2389
  0.0347 0.0334 0.0326 0.0276
Other Elect. Equip. Instr. -0.0798 -0.1358 -0.1455 -0.2188
0.1099 0.1326 0.1306 0.1402
Transport 0.0505 0.0507 0.0557 0.1212
0.0681 0.0718 0.0621 0.0409
Furniture Manuf. n.e.c. 0.2256 0.2368 0.2402 0.2218
0.1188 0.1257 0.1253 0.1289
Electricity, Gas Water -0.0748 -0.0936 -0.0828 -0.0372
0.0440 0.0416 0.0434 0.0322

Observations 392 392 364 260
Adj. R2 0.10 0.11 0.22 0.28
Time Dummies yes yes yes yes
Industry Dummies --- yes yes yes
Leverage Industries excluded --- --- yes yes
Notes Significance levels significant at 10
significant at 5 significant at 1.
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Isolating Industry Productivity DifferencesOLS
and Fixed Effects TFP Growth (Services)

• TFP growth differentials High-skill intensive
  and other industries

Total Sample (19912005) Total Sample (19912005) Split (gt1995)

ICT Capital Deepening -0.0157 -0.0255 -0.0527
  0.0201 0.0330 0.0539
ICT ? HS Intensive Ind.
Financial Intermed. Insurance 0.2126 0.1986 0.1592
  0.0374 0.0693 0.0668
Real Estates 0.0520 0.0585 0.0759
  0.0353 0.0534 0.0423
Business Services 0.0122 0.0108 0.0241
0.0270 0.0447 0.0557

Observations 238 238 170
Adj. R2 0.05 0.12 0.14
Time Dummies yes yes yes
Industry Dummies --- yes yes
Notes Significance levels significant at 10
significant at 5 significant at 1.

• Business Services could not reap productivity
  gains from ICT
• Comprise around 16 of market economy value-added
• Exhibit strong negative drag on services
  aggregate TFP growth

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Industry Contributions to Aggregate TFP Growth
High-Skill-Intensive Industries VA share 2005 () TFP Contributions TFP Contributions TFP Contributions
High-Skill-Intensive Industries VA share 2005 () 19921995 19962000 20012005

Real Estate 15.5 0.21 -0.03 0.14
Other Business Services 11.6 -0.11 -0.58 -0.23
Financial Intermediation 4.4 0.01 0.16 0.03
Motor Vehicles 4.1 0.00 -0.13 0.16
Electricity, Gas 2.7 0.01 0.11 0.09
Rental Leasing Services 2.4 -0.07 -0.02 -0.08
Electrical Apparatus n.e.c. 2.0 0.00 0.08 -0.01
Computer and Related Activities 2.0 -0.04 0.00 -0.05
Instruments 1.3 0.00 0.05 0.01
Insurance 1.2 0.03 -0.12 -0.11
Aux. Fin. Ins. Intermediation 0.9 -0.02 -0.02 -0.09
Radio, TV Comm. Equipment 0.7 0.03 0.04 0.11
Other Transport Equipment 0.7 -0.03 0.07 0.04
Furniture manufacturing n.e.c. 0.7 -0.03 0.01 -0.01
Research and Development 0.5 0.01 0.02 -0.02
Water Supply 0.4 -0.01 0.00 0.00
Office Machinery Computers 0.2 0.03 0.11 0.06
Mining Quarrying, ex. Energy 0.1 0.01 0.00 -0.01
Energy Mining Quarrying 0.1 0.03 -0.03 -0.02
Recycling 0.1 0.00 0.00 -0.01
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Conclusion

• There is an ICT-skill complementarity for German
  industries
• High-skill-intensive industries have higher ICT
  capital deepening, especially in the services
  sectors
• ICT capital deepening in other (non-high-skill-int
  ensive) industries is steadily declining
• ICT and skills enhanced industries productivity
  performance
• There are productivity increasing effects from
  ICT capital deepening in high-skill-intensive
  goods producing and services industries,
  especially post 1995 (cp. TFP growth regressions)
• Negative total factor productivity growth in
  high-skill-intensive services (cp. growth
  accounting exercises) is due to weak performance
  of Business Services
• Potential explanations
• Measurement of services output
• Regulations might hinder ICT diffusion (Nicoletti
  et al., 2006)
• Share of high-skilled workers too low (e.g. brain
  drain)

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Industry Classification High-Skill Intensity
High-Skilled Shares in Total Hours Worked High-Skilled Shares in Total Hours Worked High-Skilled Shares in Total Hours Worked High-Skilled Shares in Total Hours Worked
19911995 19962000 20012004 1991-2004
1 Agriculture, Forestry, Fishing 3.60 3.30 3.42 3.44

Goods Producing Industries
2 Energy Mining Quarrying 6.82 8.12 8.52 7.77
3 Food Tobacco, Textiles 1.96 2.40 2.70 2.33
4 Other Manufacturing? 5.44 6.24 7.01 6.17
5 Electrical Optical and Transport Equip. 12.50 13.96 13.82 13.40
6 Manuf. n.e.c., Recy. Elect., Gas Water Supply 6.82 8.12 8.52 7.77
7 Construction 3.60 3.88 4.30 3.90

Market Services
8 Wholesale Retail Trade, Hotels Catering 3.00 3.20 3.57 3.24
9 Transport and Communications 3.34 3.22 3.72 3.41
10 Financial Intermediation 8.60 10.28 11.32 9.98
11 Real Estates, Renting and Business Activities 13.74 13.72 14.27 13.89
Median 5.44 6.24 7.01 6.17
Mean 6.31 6.95 7.38 6.84
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Industry Classification Detailed Disaggregation

High-Skill-Intensive Industry Groups WZ2003 Classification (ifo Database)

High-Skill-Intensive Goods Producing Industries
Energy Mining Quarrying Energy Mining and Quarrying
Mining and Quarrying, ex. Energy
Office Machinery Computers Office Machinery and Computers
Other Elect. Equip. Instruments Electrical Apparatus n.e.c.
Radio, TV and Comm. Equipment
Instruments, Optics and Watches
Transport Motor Vehicles
Other Transport Equipment
Furniture manufacturing n.e.c. Furniture and Manufacturing n.e.c.
Recycling
Electricity, Gas, and Water Supply Electricity, Gas
Water Supply
High-Skill-Intensive Services Sectors
Financial Intermediation Insurance Financial Intermediation
Insurance
Auxiliaries Financial and Insurance Intermediation
Real Estates Real Estates
Business Services Rental and Leasing Services
Computer and Related Activities
Research and Development
Other Business Services
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Avg. Labor Productivity Growth US vs. Germany
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Avg. Labor Productivity Growth US vs. Germany
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Avg. Labor Productivity Growth US vs. Germany