The role of production factor quality and technology diffusion in twentieth-century productivity growth

Abstract

The twentieth century was a period of exceptional growth, driven mainly by the increase in total factor productivity (TFP). Using a database of 17 OECD countries over the 1890–2013 period, this paper integrates production factor quality into the measure of TFP, namely by factoring the level of education of the working-age population into the measure of labor and the age of equipment in the measure of capital stock. We then estimate how the diffusion of technology impacts the growth of this newly measured TFP through two emblematic general purpose technologies, electricity and information and communication technologies (ICT). Using growth decomposition methodology from instrumental variable estimates, this paper finds that education levels contribute most significantly to growth, while the age of capital makes a limited, although significant, contribution. Quality-adjusted production factors explain less than half of labor productivity growth in the largest countries except for Japan, where capital deepening posted a very large contribution. As a consequence, the “one big wave” of productivity growth (Gordon in Am Econ Rev 89(2):123–128, 1999), as well as the ICT productivity wave for the countries which experienced it, remains only partially explained by quality-adjusted factors, although education and technology diffusion contribute to explain the earlier wave in the USA in the 1930s–1940s. Finally, technology diffusion, as captured through our two general purpose technologies, leaves unexplained between 0.6 and 1 percentage point of yearly growth, as well as a large proportion of the two twentieth-century technology waves. These results both support a significant lag in the diffusion of general purpose technologies and raise further questions on a wider view on growth factors, including changes in the production process, management techniques and financing practices. Measurement problems may also contribute to the unexplained share of growth.