IDEAS home Printed from https://ideas.repec.org/p/eab/macroe/22437.html
   My bibliography  Save this paper

Effects of Technological Improvement in the ICT-Producing Sector on Business Activity

Author

Listed:
  • Hian Teck Hoon

    (SMU)

Abstract

It seems to be taken for granted by many commentators that the sharp decline in prices of computers, telecommunications equipment and software resulting from the technological improvements in the information and communications technology (ICT)-producing sector is good for jobs and is a major driving force behind the non-inflationary employment miracle and booming stock market in the latter half of the nineties in the U.S. and their recurrence since 2004. We show that, in our model, a technical improvement in the ICT-producing sector by itself cannot explain a simultaneous increase in employment and a rise in firms valuation (or Tobins Q ratio). There are two cases. If the elasticity of equipment price (pI ) with respect to ICT-producing sectors productivity is less than one, labors value marginal productivity increases thus pulling up the demand wage and expanding employment. However, the increased output by adding to the capital stock and thus driving down future capital rentals causes a decline in firms valuation, q per unit, even though Tobins Q (= q=pI ) is up. If the elasticity is greater than one, equipment prices fall so dramatically that labors value marginal productivity declines, employment in the ICT-using sector expands proportionately more than the increase in capital stock, thus raising future capital rentals, so both firms valuation and Tobins Q rise; but then real demand wage falls and employment contracts. The key to generating a booming stock market alongside employment expansion is to hypothesize that when technical improvement in the ICT-producing sector occurs, the market forms an expectation of future productivity gains to be reaped in the ICT-using sector. Then we can explain not only the stock market boom and associated rise in investment spending and employment in the period 1995-2000 but also the subsequent decline in employment, in Tobins Q and in investment spending in 2001, with consumption holding up well as productivity gains in the ICT-using sector were realized. An anticipation of a future TFP improvement in the ICT-using sector can once more play the role of raising the stock market.

Suggested Citation

  • Hian Teck Hoon, 2006. "Effects of Technological Improvement in the ICT-Producing Sector on Business Activity," Macroeconomics Working Papers 22437, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:macroe:22437
    as

    Download full text from publisher

    File URL: http://www.eaber.org/node/22437
    Download Restriction: no

    References listed on IDEAS

    as
    1. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
    2. Feldstein, Martin, 2003. "Why is Productivity Growing Faster?," Scholarly Articles 2794834, Harvard University Department of Economics.
    3. William Nordhaus, 2005. "The Sources of the Productivity Rebound and the Manufacturing Employment Puzzle," NBER Working Papers 11354, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:ksa:szemle:1714 is not listed on IDEAS

    More about this item

    Keywords

    Business asset valuation; investment spending; Employment;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eab:macroe:22437. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shiro Armstrong). General contact details of provider: http://edirc.repec.org/data/eaberau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.