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Economic Review

Economic Review
C O N T E N T S
Third Quarter 2002/Volume 87, Number 3

Economic Review articles are posted on the Web as they become available. Page numbers in the PDF file posted here may not reflect the page numbers of the printed version.

PRESIDENT
JACK GUYNN

SENIOR VICE PRESIDENT AND
DIRECTOR OF RESEARCH

ROBERT A. EISENBEIS

RESEARCH DEPARTMENT
THOMAS J. CUNNINGHAM
Vice President and
Associate Director of Research

GERALD P. DWYER JR.
Vice President, Financial

WILLIAM ROBERDS
Vice President, Macropolicy

LARRY D. WALL
Research Officer, Financial

JOHN C. ROBERTSON
Assistant Vice President, Regional

ELLIS W. TALLMAN
Assistant Vice President, Macropolicy

TAO ZHA
Assistant Vice President, Macropolicy

PUBLIC AFFAIRS
BOBBIE H. MCCRACKIN
Vice President

LYNN H. FOLEY
Editor

NANCY PEVEY
Managing Editor

CAROLE L. STARKEY,
PETER HAMILTON, AND JILL DIBLE
Designers

ALISON BOUNDS
Marketing and Circulation

CHARLOTTE WESSELS
Administrative Assistance

The Economic Review of the Federal Reserve Bank of Atlanta, published quarterly, presents analysis of economic and financial topics relevant to Federal Reserve policy. In a format accessible to the nonspecialist, the publication reflects the work of the Research Department. It is edited, designed, produced, and distributed through the Public Affairs Department.

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ISSN 0732-1813

Preface: Technology, Growth, and the Labor Market
Donna K. Ginther and Madeline Zavodny

In recent years, economic prognosticators have pondered whether the U.S. economy has entered a new era characterized by technological innovations that have raised productivity and, accordingly, removed pricing power from producers. Although the 2001 recession quelled debate about whether the United States, and perhaps the world, had entered a period of sustained high levels of economic growth, researchers continue to investigate the economic effects of technological change.

This issue of the Economic Review contains four articles that examine the underpinnings of the “new economy”—technology and its effects on macroeconomic growth and the labor market. These papers were among those presented at the “Technology, Growth, and the Labor Market” conference sponsored by the research department of the Federal Reserve Bank of Atlanta and the Andrew Young School of Policy Studies at Georgia State University in January this year. This preface summarizes all the speeches, papers, and discussant comments presented at the conference.


Projecting Productivity Growth: Lessons from the U.S. Growth Resurgence
Dale W. Jorgenson, Mun S. Ho, and Kevin J. Stiroh

Following the 1995–2000 period of more rapid output growth and lower inflation in the United States, economists have strenuously debated whether improvements in economic performance can be sustained. The recession that began in March 2001 intensified the debate, and the economic impacts of the events of September 11 have yet to be fully understood. Both factors add to the considerable uncertainties about future growth that currently face decision makers in both the public and private sectors.

In this article, the authors analyze the sources of U.S. labor productivity growth in the post-1995 period and present projections for both output and labor productivity growth for the next decade. Despite the 2001 downward revisions to U.S. gross domestic product and software investment, the authors show that information technology (IT) played a substantial role in the U.S. productivity revival. The article then outlines a methodology for projecting trend output and productivity growth. The base-case projection puts the rate of trend productivity growth at 2.21 percent per year over the next decade with a range of 1.33 to 2.92 percent, reflecting fundamental uncertainties about the rate of technological progress in IT-production and investment patterns. The central projection is only slightly below the average growth rate of 2.36 percent during the 1995–2000 period.


Information Technology and Productivity: Where Are We Now and Where Are We Going?
Stephen D. Oliner and Daniel E. Sichel

Productivity growth in the U.S. economy jumped during the second half of the 1990s, a resurgence that many analysts linked to developments in information technology (IT). However, shortly after this consensus emerged, demand for IT products fell sharply, leading to a debate about the connection between IT and productivity and about the sustainability of the faster growth.

This article contributes to this debate in two ways. First, the authors provide updated estimates of the proximate sources of growth using a growth accounting framework that focuses on information technology. Their results confirm that the acceleration in labor productivity after 1995 was driven by the greater use of IT capital goods and the more rapid efficiency gains in the production of these goods. Second, to assess whether the pickup in productivity growth is sustainable, the authors analyze the steady-state properties of a multisector growth model. This exercise generates a range for labor productivity growth of 2 percent to 2 3/4 percent per year, which suggests that much—and possibly all—of the resurgence is sustainable.

The analysis also highlights that future increases in output will depend on the pace of technological advance in the semiconductor industry and on the extent to which products embodying these advances diffuse through the economy.


Technology and U.S. Wage Inequality: A Brief Look
David Card and John E. DiNardo

As labor market analysts in the late 1980s and early 1990s documented a rising wage inequality, a series of papers argued that this development was related to rapid technological change. These papers and the large literature that followed established a basis for the virtually unanimous agreement among economists that developments in computers and related information technologies in the 1970s, ’80s, and ’90s have led to increased wage inequality.

This view has become known as the “skill-biased technological change” (SBTC) hypothesis—the view that a burst of new technologies increased demand by employers for highly skilled workers (who are more likely to use computers) and that this increased demand led to a rise in the wages of the highly skilled relative to those of the less skilled.

The authors of this article reconsider the evidence for the SBTC hypothesis and focus on changes over time in overall wage inequality and in the evolution of different groups of workers’ relative wages. In doing so, they conclude that SBTC falls far short of unicausal explanation of the substantial changes in the U.S. wage structure of the 1980s and 1990s and does not, by itself, prove to be particularly helpful in organizing or understandings these changes. The article concludes that it is time to re-evaluate the case that SBTC offers a satisfactory explanation for the rise in U.S. wage inequality.


Productivity, Computerization, and Skill Change
Edward N. Wolff

Until recently, most studies examining the effect of computerization on productivity have shown little evidence of a payoff to computer investment in terms of productivity growth. Most of these studies have focused on the connection between information technology (IT) or information and communications technology (ICT) and productivity, but few have examined the linkages between IT and broader indicators of structural change. This article helps fill that gap.

The article concentrates on the relation of skills, education, and computerization to productivity growth and other indicators of technological change on the industry level. After reviewing the pertinent literature, the author introduces an accounting framework and model and presents descriptive statistics on post-World War II productivity trends and key variables that have shaped productivity growth patterns during that period. A multivariate analysis on the industry level assesses these variables’ influence.

The analysis shows no evidence that the growth of educational attainment has any statistically measured effect on industry productivity growth. The growth in cognitive skills, on the other hand, is significantly related to industry productivity growth though the effect is very modest. In addition, the study finds no econometric evidence that computer investment is positively linked to total factor productivity growth. The author concludes that the effects of IT show up more strongly in terms of measures of structural change rather than in terms of productivity.


Global Banks, Local Crises: Bad News from Argentina
Marco Del Negro and Stephen Kay

Banking crises have been a recurrent phenomenon in Latin America over the past few decades. Some have argued that the internationalization of the banking sector has ushered in a new era: what used to be systemic risk from the perspective of local banks with undiversified portfolios might no longer be systemic from the standpoint of large international banks.

Argentina’s experience shows that the presence of international banks was not enough to prevent local banking crises and sizable losses to depositors. The “bad news” from Argentina, this article argues, is that depositors in emerging markets may not reap the full benefits of international portfolio diversification because international banks have limited liability, at least under some circumstances—for instance, when the local government heavily intervenes in the banking system. The authors emphasize that while the limited-liability feature of international banks may seem bad ex post—and, of course, it is from the perspective of Argentine depositors—this feature may well be desirable, perhaps even necessary, ex ante.

The article first presents evidence of the globalization of the banking sector in Latin America and the dramatic increase of the phenomenon in the late nineties. After reviewing the literature on the pros and cons of international banks in emerging markets, the authors focus on the legal issues behind the limited-liability feature. The authors examine the new evidence that Argentina’s recent experiences provide and conclude by analyzing the pros and cons of the limited-liability feature.