total factor productivity growth (or technological change)

An improvement in technology that changes the firm’s production function such that more output is obtained from the same amount of inputs.

You might have heard discussion about the shrinking of the U.S. manufacturing sector over the past several decades. It’s true that manufacturing employment has fallen—a lot. In 1997 there were 17 million manufacturing workers in the United States, about 18% of the total private sector workforce. Of these, 10 million workers were employed by companies manufacturing durable goods—goods that have long service lives, such as appliances, airplanes, cars, metal and wood products, and electrical equipment. By the end of 2014, there were only 12.1 million manufacturing workers, just over 10% of the private workforce, 7.7 million of whom were making durable goods. (This wasn’t just due to the Great Recession, either. Manufacturing’s share of employment had dropped steadily before 2008 as well.)

Given this trend, it might surprise you to find out that the total value of manufactured products made in the United States increased over the same period. Not by just a little, either. While the total inflation-adjusted output of private businesses grew by 43% between 1997 and 2013, the manufacturing sector’s total output grew 36%, about just as fast. Furthermore, the total inflation-adjusted output of U.S. durable goods rose 75% over the period.

How is it possible for manufacturing employment to fall for an extended time while the sector’s output grows just as fast as, or even faster than, the rest of the economy? A partial answer to this question is that manufacturing firms shifted from using labor to using more capital inputs. But that’s not the whole story. Much of the explanation lies in the fact that technological change was faster in manufacturing than in the rest of the economy, particularly in durable goods manufacturing.

Figure 6.14 shows the growth of technology (total factor productivity) for three segments of the U.S. economy. The largest segment is the private business sector, which includes just about every producer in the economy outside of government bodies, including manufacturers. The second is the manufacturing sector, a subset of the first group, and the third isolates durable goods manufacturers specifically as a subset of the second group. The level of technology in each segment is given by an index, where the value of the index expresses the segment’s total factor productivity level as a fraction of its value in 1997. So, for instance, an index value of 110 in a particular year means that the segment’s total factor productivity is 10% higher than it was in 1997. This means that, given any fixed set of inputs, the segment’s producers can make 10% more output than they could in 1997.

A comparison of the rates of technological change helps explain why manufacturing output could have gone up even as employment fell. Total factor productivity for the entire private business segment grew by 18% during the period, meaning producers were able to make 18% more output from the same set of inputs in 2012 as they could in 1997. Manufacturers saw a 23% increase in total factor productivity during the period, and that includes a big slide during the Great Recession that wasn’t experienced by the economy as a whole. Durable goods manufacturers, in particular, saw a much stronger rate of technological change during the period. They were able to produce 44% more output in 2012 with the same inputs they used in 1997. This meant that they could use even fewer inputs than producers in other segments of the economy and still experience the same total output growth. This relative productivity growth, combined with the fact that they substituted more capital-intensive production, explains how they were able to double output over the period even while using less labor.

Why Do Indian Fishermen Love Their Cell Phones So Much?

There are few products more cherished by American consumers than the cell phone. The modern smartphone is truly a technological wonder—used not just for phone calls and text, but also as a browser, calendar, GPS device, MP3 player, and video streamer. It’s hard to imagine, as you lovingly caress your iPhone, that it was only a little over 25 years ago that the first cell phone, the Motorola DynaTAC 8000x, hit the consumer marketplace.* Weighing in at a hefty 1.75 pounds (almost 6 times the weight of the iPhone), it had a battery life of 60 minutes of use. All it did was make phone calls, and the sound quality was horrible. The price tag, adjusting for inflation: over $9,000. In the history of humankind, there are few examples of technological progress occurring as rapidly as has been the case with cell phones.

^*The DynaTAC 8000x was the first cell phone available to the general public, but it was not the first cell phone produced or even to make a successful phone call. That distinction goes to an even heavier prototype in 1973.

When economists talk about technological progress, they are referring to changes in the production function. Compared to 30 years ago, we’ve gotten much better at taking a set of inputs (e.g., plastic, silicon, metal, the time of engineers and factory workers, etc.) and turning them into cell phones.

Although it is natural to think of technological progress in terms of innovations in manufacturing, there are many other sources of such progress. Indeed, the cell phone is not just the beneficiary of technological progress—in some parts of the world, it is an important source of technological progress. Economist Robert Jensen has studied fishing villages in Kerala, a state on India’s southern coast.^† In the area observed, he looked at 15 markets where fishermen and consumers met to buy and sell the day’s catch. If there were not enough buyers, the excess fish would go to waste because of the absence of refrigeration. If there were not enough sellers, some of the consumers went away empty-handed. Prices varied wildly in response to daily fluctuations in supply and demand, and up to 8% of fishermen had to let their fish go to waste because there was no demand.

†Robert Jensen, “The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector,” The Quarterly Journal of Economics 122, no. 3 (2007): 879–924. The figure is reproduced by permission of Oxford University Press and Professor Jensen.

Traditionally, fishermen would take their boats out to sea, make their catch, and face a guessing game as to which market to choose on a given day. Then cell phone coverage came to the area. Very quickly, fishermen adopted cell phones, which allowed them to call ahead to determine which market would offer them the best prices on their fish. Better information led to better matching of buyers and sellers. There were rarely wasted fish; in fact, Jensen found that after the complete adoption of cell phones, it became extremely rare for sellers not to find buyers for their fish. The figure presents evidence of just how profoundly cell phones affected this market. It shows the fluctuation in fish prices over time in three areas in Kerala. Each colored line in the graph represents prices at one particular market. The introduction of cell phones was staggered across regions, and the points at which cell phones became available are denoted by the vertical lines near week 20 for Region I, week 100 for Region II, and week 200 for Region III.

Before cell phones, prices in each region were extremely volatile. Sometimes prices were almost as high as 14 rupees per kilogram on one beach, whereas at another beach on the same day, the fish were basically given away for free. From day to day, it was difficult if not impossible to predict which market would have the best price. The impact of cell phone use on the market was seen as soon as cell phone service became available in each area, although as you might expect, it took a few weeks for people to learn how to adjust and figure out how best to use this new technology. Roughly 10 weeks after the introduction of cell phones into this industry, though, the variation in prices across beaches in each of the three regions on a given day had shrunk dramatically.

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