The recent boom in information technology (IT) provides a useful backdrop against which to consider the methodology of productivity accounting. The standard methodology introduced by Robert Solow permits the isolation of total factor productivity (TFP) and its disaggregated sectoral components, but it fails to offer a framework for understanding how the individual factor-specific productivities (FSPs) of particular inputs of capital and labor have evolved. The Solowian procedure thus leaves unexplained the changes in relative factor productivities that naturally tend to occur during technological revolutions like the recent IT boom. To overcome this deficiency, analysts have developed new measures to identify the specific productivities of labor and capital inputs. These measures, combined with a structural-equilibrium interpretation of the economy, are consistent with the IT-driven technological change experienced since the mid-1970s.
Amanda L. Kramer
Order single copies or subscribe to Economic Quarterly and other publications from the Federal Reserve System.