Interpreting the 'One Big Wave' in US Long-Term Productivity Growth
This paper assesses the ‘one big wave’ in multi-factor productivity (MFP) growth for the United States since 1870. The wave-like pattern starts with slow MFP growth in the late 19th century, then acceleration peaking in 1928-50, and then a deceleration to a slow rate after 1972 that returns to the poor performance of 1870-1891. A counterpart of the standard data is a mysterious doubling in the ratio of output to capital input when the postwar era is compared with 1870-1929. Measurement adjustments are applied to the standard input data for changes in the composition of labour and capital and for previous errors in the measurement of capital. A new MFP series taking account of all these adjustments grows more slowly throughout, and the ‘big wave’ phenomenon is both flatter and extends back further in time to 1891. Solved completely is the previous puzzle of the jump in the output-capital ratio; in the new data this ratio is actually lower in 1996 than in 1870. The primary substantive explanation for the big wave lies in the timing of inventions. MFP growth during the ‘big wave’ period benefited from the diffusion of four great clusters of inventions that dwarf today's information technology revolution in their combined importance. A complementary hypothesis is that the partial closing of American labour markets to immigration and of American goods markets to imports during the big wave period gave an artificial and temporary boost to real wages which fed back into boosting productivity growth, followed by a reopening that contributed to the post-1972 productivity slowdown.
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