Consider a country in which capital per hour of work from 1950 to 1973 grew by 3 percent per year and output per hour of work grew by about 3 percent per year. Suppose that from 1973 to 1991, capital per hour of work did not grow at all and output per hour of work grow by about 1 percent per year. How much of the slowdown in productivity (output per hour of work) growth was due to technological change? Explain. (Assume that the coefficient on capital in the growth accounting formula is 1/3).
To calculate the amount of slowdown in productivity growth due to technological change, we can use the growth accounting formula. The formula represents total productivity growth as the sum of the contributions from capital accumulation, labor input, and technological change.
The formula is as follows:
Total Productivity Growth = Capital Contribution + Labor Contribution + Technological Change Contribution
Assuming a coefficient of 1/3 for the capital contribution, we can calculate the respective contributions for the two time periods:
1950-1973:
- Capital Contribution: Capital per hour of work growth rate = 3% per year
- Labor Contribution: Output per hour of work growth rate = 3% per year
- Technological Change Contribution: Total Productivity Growth - (Capital Contribution + Labor Contribution)
Given that the Total Productivity Growth rate is also 3% per year, we can substitute the values into the equation:
Total Productivity Growth = 3% per year
Capital Contribution = 1/3 * 3% per year = 1% per year
Labor Contribution = 3% per year
Technological Change Contribution = Total Productivity Growth - (Capital Contribution + Labor Contribution)
Technological Change Contribution = 3% per year - (1% per year + 3% per year)
Technological Change Contribution = -1% per year
Therefore, from 1950 to 1973, there was a negative contribution of 1% per year from technological change. This implies that technological change had a dampening effect on productivity growth during this period.
Now, let's calculate the contributions for the second time period, from 1973 to 1991:
1973-1991:
- Capital Contribution: Capital per hour of work growth rate = 0% per year (assuming no growth)
- Labor Contribution: Output per hour of work growth rate = 1% per year
- Technological Change Contribution: Total Productivity Growth - (Capital Contribution + Labor Contribution)
Given that the Total Productivity Growth rate is 1% per year, we can substitute the values into the equation:
Total Productivity Growth = 1% per year
Capital Contribution = 1/3 * 0% per year = 0% per year
Labor Contribution = 1% per year
Technological Change Contribution = Total Productivity Growth - (Capital Contribution + Labor Contribution)
Technological Change Contribution = 1% per year - (0% per year + 1% per year)
Technological Change Contribution = 0% per year
Therefore, from 1973 to 1991, there was no contribution from technological change to productivity growth. This suggests that the slowdown in productivity growth during this period can be attributed entirely to factors other than technological change.
In conclusion, the amount of slowdown in productivity growth due to technological change can be quantified as follows: from 1950 to 1973, there was a negative contribution of 1% per year from technological change, while from 1973 to 1991, there was no contribution from technological change.