CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

Labor Productivity:

Developments Since 1995

MARCH 2007

1965 1975 1985

4.2

4.0

0

4.4

4.6

1955 1995 2005

Trend Growth

(1947–1973)

2.6 Percent

Trend Growth

(1996–2006)

2.9 Percent 4.8

5.0

Trend Growth

(1974–1995)

1.4 Percent

Index

3.8
Pub. No. 2744
The Congress of the United States O Congressional Budget Office

CBO

Labor Productivity: 

Developments Since 1995

March 2007

A

PAPER
Notes

All years are calendar years.

Numbers in the text and tables may not add to totals because of rounding.

The shaded vertical bars in the figures indicate business-cycle recessions, as determined by the 

National Bureau of Economic Research.
Preface

The Congressional Budget Office (CBO) regularly reviews the methods it uses to develop 

its economic and budget projections. Among the more important assumptions that underlie 

CBO’s economic forecast is the projection for the growth of labor productivity. It is widely 

recognized that labor productivity accelerated during the mid-1990s and that the increase in 

growth has largely continued until the present. This paper, prepared at the request of the 

Chairman and the Ranking Member of the Senate Budget Committee, documents that productivity acceleration, highlighting some less-well-known aspects of the upswing in growth, 

including the effect that data revisions have had on CBO’s view of the trend in productivity 

growth and the shift in the source of the growth in labor productivity from increases in capital 

per worker toward total factor productivity. 

The paper also explores the reasons for the productivity acceleration and concludes that it 

likely stemmed from developments in the information technology (IT) sector, including faster 

technological change in the production of IT goods and the boom in business investment in 

those goods. Although widely accepted, that explanation raises two questions: Why did productivity growth accelerate further during a period—the years since the 2001 business-cycle 

peak—when IT investment fell substantially? And why did European economies fail to experience a similar productivity surge even though they had access to the same IT goods that 

were available in the United States? The paper outlines several possible answers to those questions but concludes that further research will be necessary before economists can provide a 

consensus answer.

Robert Arnold of CBO’s Macroeconomic Analysis Division wrote this paper under the supervision of Robert Dennis and John Peterson. Donald Marron, Arlene Holen, and 

Kim Kowalewski provided valuable comments. Kate Kelly edited the manuscript, and 

Christian Howlett proofread it. Andrew Gisselquist assisted with formatting, and Maureen 

Costantino prepared the paper for publication. Lenny Skutnik produced the printed copies, 

Linda Schimmel coordinated the print distribution, and Annette Kalicki and Simone Thomas 

prepared the electronic version for CBO’s Web site (www.cbo.gov).

Peter R. Orszag

Director

March 2007

Contents

Labor Productivity Growth Since 1995 2

New Cyclical Pattern 4

Shifting Sources of Growth 4

Explaining the Post-1995 Productivity Acceleration 6

Explaining the Post-2001 Productivity Acceleration 8

Explaining the Lag in European Productivity Growth 11

CBO’s Projections 12

Tables

1. Changes in Estimates of the Average Annual Growth 

Rate for Labor Productivity 3

2. Contributions of Capital Deepening and Total Factor 

Productivity to Labor Productivity Growth, 

1990 to 2005 5

Figures

1. Labor Productivity and Trend Growth, 1950 to 2006 2

2. Growth in Labor Productivity, 1950 to 2006 4

3. Total Factor Productivity and Trend Growth, 1980 to 2006 6

4. Investment in Producers’ Durable Equipment, 1960 to 2006 7

Labor Productivity: Developments Since 1995

One striking aspect of recent U.S. economic history has been the vigorous growth in labor productivity. 

Between 1995 and 2006, the nation’s labor productivity, 

or output per hour worked, grew at an average annual 

rate of 2.7 percent, well above its 1947–1995 average of 

2.1 percent. The acceleration occurred despite several 

shocks that buffeted the economy during the period—a 

recession, two wars, terrorists’ attacks, corporate governance scandals, and a sharp increase in the price of oil.1

More recently, productivity growth slowed, which has 

raised concerns that the trend rate of growth has shifted 

again. Since 2003, labor productivity growth has averaged 1.8 percent annually, and in the final two quarters of 

2006 it averaged 0.5 percent at an annual rate. This 

recent slowdown underscores the variability in productivity growth and highlights the need for a long-term perspective when estimating trends in productivity. It also 

highlights the need to identify the sources of changes in 

productivity growth to determine whether they are likely 

to persist.

Productivity growth is the fundamental source of longterm improvement in standards of living. When workers 

are able to produce more output per hour of work, economic theory predicts that they will receive more pay, on 

average; and indeed, this is what the data show. Growth 

in aggregate real (inflation-adjusted) labor compensation 

generally has matched changes in overall productivity 

growth in the United States since World War II. The 

relationship, however, is not tight—the two measures can 

diverge for spans of several years—and the gains from 

productivity growth do not appear to be shared equally: 

Gains for the typical worker (and for lower-compensated 

workers) have trailed behind the average increase since 

the late 1990s while gains for highly compensated workers have exceeded the average.2

The trend in productivity growth also plays an important 

role in the budget outlook published by the Congressional Budget Office (CBO), because productivity 

growth is a key determinant of potential gross domestic 

product (GDP). The estimate and projection of potential 

GDP—the level of gross domestic product that corresponds to a high rate of resource use—drives CBO’s projections of actual GDP and of tax bases for the 10 years 

ahead. For example, CBO estimates that each increase of 

0.1 percentage point in the average growth rate of labor 

productivity would, if sustained for 10 years, raise the 

level of GDP in 2017 by roughly 1 percent, or by about 

$200 billion. A higher level of GDP, in turn, would mean 

that the government could collect more in taxes and 

spend less on interest on the debt. All told, each increase 

of 0.1 percentage point would be expected to cut the deficit by an amount that also would rise each year, climbing 

to an annual reduction of roughly $60 billion by 2017. 

This paper describes the behavior of labor productivity 

since 1995, highlighting several aspects of productivity 

growth that perhaps have not been widely recognized and 

examining some possible explanations for the acceleration. Analysts have concluded that the productivity 1. Labor productivity is average real (inflation-adjusted) output per 

hour of labor; it is defined for the nonfarm business sector (the 

overall economy, excluding government, farms, residential housing, nonprofit institutions, and private households). Labor productivity differs from total factor productivity (TFP), a concept 

discussed later in this paper, in that increases in capital per worker 

increase labor productivity but not TFP.

2. See Ian Dew-Becker and Robert Gordon, Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of 

Income, Working Paper 11842 (Cambridge, Mass.: Bureau of 

Economic Research, December 2005).
2 LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995

Figure 1.

Labor Productivity and Trend Growth, 

1950 to 2006

(Index)

Sources: Congressional Budget Office; Department of Labor, Bureau 

of Labor Statistics.

Note: Index (1996 = 1.0); data expressed in logarithmic form.

acceleration likely stemmed from developments in the 

information technology (IT) sector, including rapid technological change in the industries that produce IT goods. 

Labor Productivity Growth Since 1995

After more than 20 years of slow growth, labor productivity accelerated sharply during the second half of the 

1990s. It then sped up again after 2001, although it has 

slowed somewhat during the past three years. Nonetheless, the post-1995 acceleration was substantial: The 

growth trend in labor productivity stepped up to nearly 

3 percent, on average, between 1995 and 2006, a rate 

considerably faster than the 1.4 percent pace from 1974 

to 1995 (see Figure 1).3

 Had it followed that pre-1996 

trend of 1.4 percent instead of the actual 2.9 percent, 

labor productivity would be 16 percent lower than it is 

today. Furthermore, if the 3 percent trend is sustained 

over the next decade, the level of real GDP will be nearly 

40 percent higher in 2017 than the level that would have 

resulted from the pre-1996 rate of growth. 

In the mid-1990s, few forecasters projected a dramatic 

increase in the trend rate of productivity growth; most 

anticipated a continuation of the modest growth of the 

two decades before. For example, in January 1995, CBO 

projected an average annual labor productivity growth 

rate of 1.3 percent for 1995 to 2000.4

 Similarly, in its 

five-year projection published in February 1995, the 

Clinton Administration projected a rate of 1.25 percent.5

And both projections for real GDP were similar to the 

GDP estimated by the consensus of private forecasters 

surveyed for the March 1995 edition of Blue Chip Economic Indicators. That concordance suggests that the 

CBO and Administration projections for labor productivity also were consistent with the Blue Chip consensus.6

The upswing in productivity growth in the second half of 

the 1990s went unrecognized until very late in the 

decade, in part because of the volatile nature of the data 

series. Labor productivity growth can swing widely from 

quarter to quarter, and two or three years is a short period 

within which to discern a new trend. Moreover, the acceleration followed on the heels of a period of subpar growth 

(productivity growth averaged only 0.22 percent annually 

between the end of 1992 and the third quarter of 1995) 

1955 1965 1975 1985 1995 2005

5.0

4.8

4.6

4.4

4.2

4.0

3.8

0

Trend Growth

(1947–1973)

2.6 Percent

Trend Growth

(1974–1995)

1.4 Percent

Trend Growth

(1996–2006)

2.9 Percent

3. The increase in the productivity growth trend since 1995 illustrated in Figure 1 consists of several changes in productivity 

growth over shorter periods. Between late 1995 and the businesscycle peak in the first quarter of 2001, for example, labor productivity growth averaged 2.5 percent annually. Between the first 

quarter of 2001 and the third quarter of 2003, labor productivity 

surged at an average annual rate of 4.5 percent before falling back 

to a 1.6 percent rate of growth between the end of 2003 and the 

end of 2006. Productivity growth averaged 2.8 percent annually 

between the peak in 2001 and the end of 2006.

4. See Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1996–2000 (January 1995).

5. See Economic Report of the President (February 1995), p. 125. 

6. One notable exception was Federal Reserve Board Chairman Alan 

Greenspan, who, as early as 1992, raised the possibility of faster 

trend growth in labor productivity, based in part on anecdotal 

evidence from industry sources. Nevertheless, Federal Reserve staff 

forecasts of trend productivity growth during that period were 

similar to the consensus of private-sector and government forecasts. For more details, see Richard G. Anderson and Kevin L. 

Kliesen, Productivity Measurement and Monetary Policymaking 

During the 1990s, Working Paper 2005-067A (Federal Reserve 

Bank of St. Louis, October 2005). 
LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995 3

Table 1.

Changes in Estimates of the Average Annual Growth Rate for Labor Productivity

(Percent)

Source: Congressional Budget Office based on data from the Bureau of Labor Statistics and the Bureau of Economic Analysis.

a. CBO’s annual January forecast is based on a Bureau of Labor Statistics data set that extends through the third quarter of the previous year.

so, initially, the faster growth looked as if it were just 

making up lost ground rather than establishing a new, 

higher trend growth rate. The history of the series 

includes several episodes of faster- or slower-than-trend 

growth that were later reversed.7

Inaccuracies in early vintages of the underlying data are 

the other reason the productivity acceleration went 

unrecognized during its early stages. Data that were available to analysts in 1996, 1997, and 1998 showed only a 

small rise in the rate of labor productivity growth. After 

several revisions, however, and with data from a longer 

period, a stronger pattern emerged. Data published by 

the Bureau of Labor Statistics (BLS) during the late1990s 

(see Table 1) illustrate the pattern. At first, there was no 

apparent acceleration. Data available in early 1997 

showed labor productivity growing by a mere 0.3 percent 

from the fourth quarter of 1995 through the third quarter of 1996. Currently available data tell a different story: 

Labor productivity growth for the period was actually a 

robust 3.1 percent. 

A similar case holds for 1998 and 1999. Data that were 

available in January 1998 showed labor productivity 

growth averaging 1.8 percent between the fourth quarter 

of 1995 and the third quarter of 1997. That rate has since 

been revised to 2.5 percent. The growth rate for the 

three-year period ending in the third quarter of 1998 also 

has been revised from 2.0 percent (using data from early 

1999) to 2.6 percent (using currently available data).

The information in Table 1 highlights an important 

point: Productivity data are revised frequently, and the 

revisions can be large enough to alter analyses of trends in 

productivity growth.8

 Indeed, after being revised upward 

several times during the late 1990s, productivity data 

have been revised downward somewhat during recent 

years. In January 2000, labor productivity growth for 

1996 to 1999 was estimated at 2.7 percent; that estimate 

has since been revised to 2.5 percent. The estimate of 

growth in total factor productivity (TFP), or output per 

unit of labor and capital combined, was revised downward by a slightly larger amount. Using current data, 

CBO estimates that TFP grew at an average annual rate 

of 1.3 percent between 1995 and 1999. In contrast, data 

available in late 1999 showed a 1.7 percent average 

annual rate of TFP growth for the period.9

Period, Beginning

CBO Forecasta Last Quarter 1995

January 1997 To 3rd Quarter 1996 0.3 3.1 2.8

January 1998 To 3rd Quarter 1997 1.8 2.5 0.7

January 1999 To 3rd Quarter 1998 2.0 2.6 0.6

January 2000 To 3rd Quarter 1999 2.7 2.5 -0.2

Using Current Data

Revision

(Percentage points)

Average Annual Rate of Growth

Initial Estimate Current Estimate

Using Original Data

7. Slower productivity growth during the past three years has raised 

concerns about the possibility of another shift in the trend, but it 

is too soon to conclude that such a shift has taken place.

8. Productivity is computed using GDP data (from the national 

income and product accounts tabulated by the Bureau of Economic Analysis) and employment data (largely from the Bureau of 

Labor Statistics payroll survey) so estimates will be affected by 

revisions to either data source. For more on those revisions, see 

Richard Anderson and Kevin Kliesen, “The 1990s Acceleration in 

Labor Productivity: Causes and Measurement,” Federal Reserve 

Bank of St. Louis Review, vol. 88, no. 3 (2006), pp. 181–202. 

Anderson and Kliesen note that early data supported only a limited role for service-producing industries in the late-1990s productivity acceleration and that improved source data have since 

revealed that growth in productivity in the service sector increased 

by more than had been estimated originally.

9. For more details on the revisions to the data underlying TFP, see 

Congressional Budget Office, The Budget and Economic Outlook: 

Fiscal Years 2006 to 2015 (January 2005), Box 2-1, p. 29.
4 LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995

Figure 2.

Growth in Labor Productivity, 

1950 to 2006

(Percentage change from previous year)

Sources: Congressional Budget Office; Department of Labor, Bureau 

of Labor Statistics.

More recently, revisions have changed the view of productivity growth in 2005 and 2006. In early 2007, BLS 

released revised productivity data that showed labor productivity growth averaged 1.5 percent annually between 

the beginning of 2005 and the third quarter of 2006. 

That rate was about 0.5 percentage points lower than 

BLS’s previous estimate of 2.0 percent. The revisions to 

the productivity data highlight the difficulty in recognizing a change in the underlying trend growth rate, warranting additional caution in reaching conclusions about 

changes in that trend based on only a few quarters’ worth 

of information.

New Cyclical Pattern

Current data show that the productivity acceleration has 

been durable, proceeding without pause through the 

2001 recession, although it has moderated somewhat 

since 2003. Quarterly growth in labor productivity is volatile, but a pattern is discernible from past business 

cycles. Typically, labor productivity declines during a 

recession but grows robustly during recovery and in the 

early stages of an expansion (see Figure 2). Although 

harder to detect, there may also be an “end-of-expansion” 

effect in operation, when productivity growth is relatively 

low near the end of a business-cycle expansion.10

Since 1995, however, labor productivity has departed 

from that pattern. Growth in labor productivity surged 

during the early phase of the recovery from the 1990 

recession and then briefly fell back toward its previous 

trend before steadily accelerating in the late 1990s, just 

when past patterns would have suggested a period of 

below-trend growth. Although it was not evident at the 

time, that acceleration during the second half of the 

1990s coincided with the latter stages of a business-cycle 

expansion. Productivity growth has remained relatively 

strong since 2000, averaging 2.7 percent despite the 2001 

recession, the attacks of September 11, 2001, the wars in 

Iraq and Afghanistan, a series of corporate governance 

scandals, and a spike in oil prices—each of which had the 

potential to restrain the growth of output and productivity. Although productivity growth has slowed somewhat 

since 2003, the volatile nature of the growth rate and the 

possibility of further revisions mean that it is too soon to 

conclude that the growth trend has slowed or that the 

economy is approaching the end of the current businesscycle expansion.

Shifting Sources of Growth

The sources of growth in productivity also have changed 

over the past decade. Analysts divide labor productivity 

growth into two components: capital deepening 

(increases in the amount of capital available per worker) 

and total factor productivity.11 Capital per worker rises 

not only because investment provides more factories, 

equipment, and software but because the quality of 

1955 1965 1975 1985 1995 2005

8

6

4

2

0

-2

-4

10. See Robert Gordon, Five Puzzles in the Behavior of Productivity, 

Investment, and Innovation, Working Paper 10660 (Cambridge, 

Mass.: National Bureau of Economic Research, August 2004). 

11. Tracing the sources of economic growth in this manner is termed 

growth accounting. An explanation is beyond the scope of this 

paper, but there is an excellent discussion of growth accounting in 

Bureau of Labor Statistics, Trends in Multifactor Productivity, 

1948–81, Bulletin 2178 (September 1983). CBO’s estimate of 

total factor productivity is similar to the bureau’s estimate of 

multifactor productivity (MFP). The two data series are calculated 

by the same method, but CBO uses slightly different source data, 

which allow it to estimate TFP for years too recent for MFP data 

to have become available.
LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995 5

Table 2.

Contributions of Capital Deepening and Total Factor Productivity to Labor 

Productivity Growth, 1990 to 2005

Source: Congressional Budget Office based on data from the Bureau of Labor Statistics and the Bureau of Economic Analysis.

capital goods improves over time. For example, the computer sitting on a typical office worker’s desk today has a 

vastly faster processor and far more disk storage than did 

an equivalent machine a decade ago. 

Although growth in TFP often is interpreted as a measure 

of technological change, it is an imperfect measure. TFP 

is computed by subtracting the growth contributions of 

labor and capital from the growth in output, so it reflects 

anything that causes output to grow faster than the combined inputs. Analysts have attributed growth in TFP to 

such factors as economies of scale, measurement error, the 

educational attainment of the labor force, the regulatory 

environment, managerial ability, and innovation. The 

calculation is imprecise, but an examination of the trends 

in TFP and capital deepening reveals that the primary 

source of growth in labor productivity has shifted during 

the past 10 years.

CBO estimates that capital deepening was the primary 

source of the surge in labor productivity growth in the 

late 1990s and that faster TFP growth was the primary 

source during the period after the business-cycle peak in 

2001. Between the first and second halves of the 1990s, 

labor productivity growth stepped up from about 1.5 percent, on average, to 2.5 percent per year. Growth in capital per worker accounted for 80 percent (0.8 percentage 

points) of that 1-percentage-point increase, CBO estimates (see Table 2). Faster TFP growth was responsible 

for the rest of the step-up in productivity growth. Those 

conclusions are based on the data as currently published, 

so it is possible that future revisions will change the 

assessment of the period.

Since 2001, the sources of growth in labor productivity 

have reversed. Business investment fell substantially in 

2001 and 2002 and remained weak in 2003, thus slowing 

the growth in capital deepening relative to that in the late 

1990s. The contribution of capital per worker to labor 

productivity growth fell by 0.6 percentage points between 

2001 and 2005 relative to the 1996–2001 period. At the 

same time, however, TFP growth was accelerating 

sharply, especially in 2003 (see Figure 3). CBO estimates 

that TFP was responsible for all of the acceleration in 

labor productivity in the 2001–2005 period.12

It is important to ask whether labor productivity will continue to grow as rapidly over the next 10 years as it has 

during the past decade. But experience since 1995 illustrates why that question is so hard to answer. Labor productivity growth is volatile, its measurement is subject to 

large revisions, and the reasons for changes in its rate of 

growth are not well understood. Consequently, it is a 

Contribution of Capital Deepening

(Percentage points) 0.50 1.33 0.76 0.83 -0.57

Contribution of Total Factor Productivity 

(Percentage points) 1.04 1.22 2.45 0.18 1.23

____ ____ ____ ____ ____

Labor Productivity (Percent) 1.54 2.54 3.21 1.01 0.66

Average Annual Growth Rate

Change

1991–1995 to

1996–2001

1996–2001 to

1991–1995 1996–2001 2002–2005 2002–2005

12. Estimates of TFP (calculated at an annual frequency) are available 

through 2005. Estimates by CBO indicate that TFP growth, like 

labor productivity growth, slowed in 2006. The conclusions about 

the shifting sources of growth in labor productivity are based on 

the growth model used to calculate CBO’s medium-term projections. However, they are consistent with results published by 

other researchers. See, for example, Dale Jorgenson, Mun Ho, and 

Kevin Stiroh, “The Sources of the Second Surge of U.S. Productivity and Implications for the Future” (working paper, Harvard 

University, March 2006); Carol Corrado and others, “Modeling 

Aggregate Productivity at a Disaggregate Level: New Results for 

U.S. Sectors and Industries” (working paper, Federal Reserve 

Board, July 2006); and Mark Lasky, Putty-Clay Capital and 

an Index of Capital per Hour, CBO Working Paper 2005-08 

(June 2005). 
6 LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995

Figure 3.

Total Factor Productivity and

Trend Growth, 1980 to 2006

(Index)

Sources: Congressional Budget Office; Department of Labor, Bureau 

of Labor Statistics.

Note: Index (1996 = 1.0); data expressed in logarithmic form.

difficult variable to forecast; past patterns and recent data 

provide only a rough guide to where labor productivity 

will go in the future. Explanations for the recent acceleration help to determine whether any of the changes 

to growth since 1995 will reverse or recur in the next 

10 years.

Explaining the Post-1995

Productivity Acceleration

Although it is hard to say conclusively that one factor is 

the sole cause of the acceleration in productivity growth 

that began in 1995, there is a consensus among economists that investment in information technology is a 

primary source. Evidence comes from studies that have 

analyzed aggregate (economywide), industry-level, and 

firm-level data.

Early evidence came from studies that used a growthaccounting framework and aggregate data to calculate the 

contributions to economic growth made by the inputs to 

production—labor, capital, and TFP. Using that framework, several analysts determined that developments in 

IT have influenced productivity growth both through 

capital deepening and through TFP growth.13 Increased 

investment in IT capital goods, spurred perhaps by falling 

prices, contributed to growth in labor productivity by 

increasing the amount of capital available to each worker 

(capital deepening). During the late 1990s, not only did 

business investment boom, but it was heavily tilted 

toward IT goods (see Figure 4). CBO’s estimates indicate 

that faster capital deepening accounted for about 80 percent of the 1-percentage-point acceleration in labor productivity during the late 1990s and that IT capital 

accounted for 75 percent of the contribution from capital 

deepening.

Rapid technological change in the IT industries (which 

include computers, software, and telecommunications) 

can speed TFP growth in those industries. And if those 

industries are large enough or the pace of technological 

change is fast enough, then faster TFP growth in that sector of the economy can accelerate TFP growth overall. 

Indeed, this is what appears to have happened in the late 

1990s. According to estimates by Steven Oliner and 

Daniel Sichel, for example, the computer and semiconductor industries accounted for about half of TFP 

growth from 1996 to 1999, even though the output 

of those industries contributed only about 2.5 percent of 

GDP in the nonfarm business sector during that 

period.14

The research illustrates that both the production and the 

use of IT goods in the United States contributed substantially to the productivity acceleration in the late 1990s. 

The studies, however, have inherent limitations. In particular, growth-accounting exercises assume the values of 

key parameters rather than estimating them by statistical 

techniques. For example, the elasticity of output with 

respect to IT capital—which measures the effect on output of an increase in the stock of IT capital—is an 

assumption that is based on the predictions of economic 

theory rather than on the results of an econometric 

regression equation. Setting the value of the elasticity

1980 1985 1990 1995 2000 2005

1.20

1.10

1.00

0.90

0

Total

Factor

Productivity

Trend Growth

2.0 Percent

Trend Growth

1.0 Percent

13. See Steven Oliner and Daniel Sichel, “The Resurgence of Growth 

in the Late 1990s: Is Information Technology the Story?” Journal 

of Economic Perspectives, vol. 14, no. 4 (2000), pp. 3–22; and Dale 

Jorgenson and Kevin Stiroh, “Raising the Speed Limit: U.S. Economic Growth in the Information Age,” Brookings Papers on Economic Activity, vol. 1 (2000), pp. 125–211. 

14. See Oliner and Sichel, “The Resurgence of Growth in the Late 

1990s” (2000).
LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995 7

Figure 4.

Investment in Producers’ Durable 

Equipment, 1960 to 2006

(Percentage of gross domestic product)

Sources: Congressional Budget Office; Department of Commerce, 

Bureau of Economic Analysis.

implies that investment spending is not wasted (on average) and that the productivity impact of, say, a newly 

acquired computer is immediate.15 That assumption 

could be an important source of error; there is evidence 

that the full effect of IT spending on productivity occurs 

after a considerable delay. Consequently, productivity 

growth in the late 1990s could have been the result of IT 

spending in the early 1990s or even in the late 1980s.

To be sure, economists would prefer to estimate the effect 

of IT spending on productivity growth rather than 

impose it by assumption, but there are considerable statistical problems associated with estimating the relevant 

parameters, at least using economywide data. The application of growth-accounting methods, however, is a 

reasonable approach that sidesteps those statistical challenges. Nevertheless, growth-accounting studies identify 

only the proximate sources of growth and not the factors 

that drive investment or technological progress.

Despite the important limitations, the fundamental conclusion of growth-accounting studies—that IT was the 

primary source of the acceleration—is still valid. Other 

studies that used industry- and firm-level data support 

the growth-accounting results and provide further information about the effects of IT spending. In a 2002 paper, 

for example, Kevin Stiroh reported that the post-1995 

revival in labor productivity was widespread, that it 

reflected gains in a majority of industries, and that it was 

linked to IT spending.16 Moreover, IT-intensive industries realized larger productivity accelerations than other 

industries did. Other researchers have reported that the 

productivity acceleration was concentrated in serviceproducing industries.17

Perhaps the strongest evidence of a link between IT and 

productivity comes from studies that use firm- or plantlevel data. That research typically uses regression equations to estimate the elasticity of output with respect to 

IT capital, and it generally reports a positive and significant relationship between IT spending and productivity.18 Indeed, some estimates from studies that use microeconomic data suggest that the productivity payoff from 

IT investment could be quite large, perhaps twice what 

would be predicted by economic theory. That is a tentative conclusion, however, and there is considerable variation among studies in the estimates of the elasticity associated with IT spending.19

15. See Robert Gordon, “Exploding Productivity Growth: Context, 

Causes, and Implications,” Brookings Papers on Economic Activity,

vol. 2 (2003), pp. 207–279.

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

10

9

8

7

6

5

4

0

Producers’

Durable

Equipment

Producers’

Durable

Equipment

Excluding

Information

Technology

16. See Kevin Stiroh, “Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?” American Economic Review, vol. 92, no. 5 (2002), pp. 1559–1576. In another 

paper, Stiroh presents evidence that the primary effect of IT 

spending is capital deepening and that such spending does not 

speed TFP growth. See Kevin Stiroh, “Are ICT Spillovers Driving 

the New Economy?” Review of Income and Wealth, vol. 48, no. 1 

(2002), pp. 33–57. Similar findings were presented by Martin 

Baily and Robert Lawrence, “Do We Have a New E-conomy?” 

American Economic Review, vol. 91, no. 2 (2001), pp. 308–312.

17. See Anderson and Kliesen, “The 1990s Acceleration in Labor Productivity.” Among service industries, it appears that TFP was the 

primary source of the acceleration in labor productivity during the 

late 1990s. See Jack Triplett and Barry Bosworth, “Productivity 

Measurement Issues in Services Industries: ‘Baumol’s Disease’ Has 

Been Cured,” Economic Policy Review, Federal Reserve Bank of 

New York (September 2003), pp. 23–33; and Barry Bosworth and 

Jack Triplett, “Is the 21st Century Productivity Expansion Still in 

Services? And What Should Be Done About It?” (paper prepared 

for the National Bureau of Economic Research Conference on 

Research in Income and Wealth, Cambridge, Mass., July 16, 

2006).
8 LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995

Analysts generally agree that IT investment is the primary 

source of the revival in labor productivity, but research on 

the causes of the acceleration has revealed two conundrums about the connection between IT investment and 

productivity. First, although spending on IT capital collapsed after 2000, a second surge in productivity began 

about the same time. And second, although IT technology is accessible to businesses anywhere in the world, the 

productivity acceleration was limited largely to the 

United States. Although European economies in particular invested heavily in IT, they have not shared in the productivity gains.

Explaining the Post-2001

Productivity Acceleration

The sources of the surge in productivity growth after 

2001 are murkier. Less time has elapsed, so analysts have 

a smaller data set for evaluation, and thus it is more difficult to identify a new trend. Moreover, the data for the 

period already have been revised substantially and 

undoubtedly will be revised again in the coming years, to 

further cloud the picture.

The second productivity acceleration occurred during a 

period when business investment collapsed, which 

strongly suggests that capital deepening was not the primary source of the surge. Indeed, the post-2001 acceleration can be explained entirely by faster TFP growth, with 

no contribution from capital deepening. Moreover, analysts have reported a shift in the set of industries responsible for the second surge in productivity. Whereas the 

post-1995 surge can be traced to the industries that were 

the most intensive users of IT capital (along with those 

that produced IT capital), the post-2001 acceleration has 

been more broadly based, and strong gains have been 

registered by industries that use IT less intensively.20

Despite that, the second surge could still be the result of 

IT spending if there is a lag between the time when the 

IT capital is installed and the time when businesses 

achieve productivity gains. If so, the surge could be a 

delayed response to the late-1990s investment boom. 

Studies that use firm-level data have identified a strong 

relationship between IT spending and productivity 

growth, and there is evidence of long delays—five to 

seven years, in some cases—between IT spending and 

productivity payoff. 

Several theories, not necessarily mutually exclusive, have 

been proposed to explain the delay. One focuses on the 

adjustment costs associated with large changes in the size 

of the capital stock. 21 According to that theory, businesses had difficulty absorbing all of the IT goods 

acquired during the investment boom of the late 1990s 

and were forced to divert resources from production in 

order to integrate new equipment and technology into 

their productive processes. If that is the case, then adjustment costs suppressed productivity growth in the late 

1990s but boosted it after 2001. The pause in capital 

spending since 2001 has allowed companies to catch up, 

and the recent hike in productivity is a delayed payoff for 

the investments of the 1990s. 

Another hypothesis holds that computers (and IT goods 

in general) are examples of general-purpose technology 

that allows businesses to fundamentally change the way 

they operate. Like dynamos and electric motors, which 

freed early-20th-century factory owners from the requirement to build next to a river, computers gave businesses a 

faster way to manage information and, therefore, a way to 

produce more efficiently. But it takes time for new technology to produce results: Business owners must learn to 

adjust processes to make the best use of the new technology, and that transition can take years, or even decades.22

Still another idea, closely related to the first two, focuses 

on the link between IT spending and investment in 

“intangible capital”—investment spending that is 

18. See Erik Brynjolfsson and Lorin Hitt, “Computing Productivity: 

Firm-Level Evidence,” Review of Economics and Statistics, vol. 85, 

no. 4 (2003), pp. 793–808; Brynjolfsson and Hitt, “Paradox Lost? 

Firm-Level Evidence on the Returns to Information Systems 

Spending,” Management Science, vol. 42, no. 4 (1996), pp. 541–

558; and Brynjolfsson and Hitt, “Information Technology as a 

Factor of Production: The Role of Differences Among Firms,” 

Economics of Innovation and New Technology, vol. 3, no. 4 (1995), 

pp. 183–200.

19. See Kevin Stiroh, “Reassessing the Impact of IT in the Production 

Function: A Meta-Analysis and Sensitivity Tests,” (working paper, 

Federal Reserve Bank of New York, November 2004).

20. See Kevin Stiroh, “The Industry Origins of the Second Surge of 

U.S. Productivity Growth” (working paper, Federal Reserve Bank 

of New York, February 2006); and Corrado and others, “Modeling Aggregate Productivity at a Disaggregate Level” (2006).

21. See Susanto Basu, John Fernald, and Matthew Shapiro, “Productivity Growth in the 1990s: Technology, Utilization, or Adjustment?” Carnegie-Rochester Conference Series on Public Policy, vol. 

55 (2001), pp. 117–165.
LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995 9

intended to increase future output more than current 

production and that does not result in ownership of a 

physical asset. When new technology is introduced, businesses must dedicate resources—time and effort—to 

training workers in its best use. That process is an investment that results in an intangible asset, a body of knowledge or expertise. The introduction of personal computers provided immediate benefits to businesses as workers 

performed regular tasks more efficiently. But to make the 

best use of the new technology—to reap its full benefits—employees had to be trained, and that training is an 

investment in an intangible asset. 

One insight of the research on intangible capital is that 

productivity growth can be understated in periods when 

IT investment is growing rapidly because businesses are 

likely to divert labor from current production in favor of 

training in the use of new IT capital. The official statistics 

treat most spending for intangible capital—formal training classes are an exception—as a current expense rather 

than as investment, so such spending is not included in 

GDP. An explanation for the pattern in productivity 

growth since 1995 is that TFP growth was suppressed in 

the late 1990s (although it continued to grow), when 

investment in IT capital was heaviest, and then was 

unleashed after 2001, when spending for intangibles to 

absorb IT capital had abated.

Another and perhaps more powerful insight from the 

research on intangible capital is that advances in information technology allow businesses to exploit the benefits of 

their investments in another form of intangible capital, 

often called “organizational capital.” As computing power 

becomes cheaper and more pervasive, managers can 

invent new business processes, work practices, and organizational structures, which in turn allow companies to 

produce entirely new goods and services or to improve 

their existing products’ convenience, variety, or quality.23

The gains in productivity made possible by organizational changes can dwarf the direct increases in productivity that arise from doing familiar tasks more efficiently.

Erik Brynjolfsson and Lorin Hitt provide case study 

examples of business transformations made possible by 

combining information technology with new work practices and other investments in organizational capital.24

Some of their examples describe changes to production 

processes, as when factories install computer-controlled 

machine tools. Although the machines can duplicate the 

established production methods (presumably more efficiently), Brynjolfsson and Hitt demonstrate that more 

substantial productivity gains accrue when old work 

methods are replaced with new organizational practices. 

Other examples show how IT investments enable companies to change their relationships with suppliers, as when 

IT investments allow a company to order supplies electronically and share inventory data with suppliers, thus 

streamlining the process of restocking inventory and 

likely cutting costs. Still other examples involve the way 

companies interact with consumers, as when a computer 

manufacturer allows its customers to configure their systems online before purchase.

The research on intangible capital reveals three reasons 

that growth-accounting calculations can misstate the true 

contributions of computers and other IT goods: First, it 

is difficult to measure changes in the quality of goods and 

services. This is especially true if the changes are intangible, involving improvements in convenience, timeliness, 

or variety, for example. Next, official statistics treat most 

spending for intangible capital as a current expense rather 

than as an investment. Consequently, most of that spending is excluded from estimates of GDP and the capital 

stock.25 Finally, standard calculations can miss the 

complementary inventions that IT makes possible. They 

can occur years (or even decades) after the initial expenditure. Growth-accounting calculations usually assume that 

the investments produce immediate results.

There is only indirect evidence that the post-2001 productivity acceleration is a delayed effect of the late-1990s 

IT boom. Some recent studies using industry-level data 

22. For more on the diffusion of technology, see Paul David, “The 

Dynamo and the Computer: An Historical Perspective on the 

Modern Productivity Paradox, American Economic Review, vol. 80, 

no. 2 (1990), pp. 355–361; or Rodolfo Manuelli and Ananth 

Seshadri, Frictionless Technology Diffusion: The Case of Tractors,

Working Paper 9604 (Cambridge, Mass.: National Bureau of Economic Research, April 2003). Another study concluded that there 

were substantial delays between IT investment and increased productivity in the trucking industry: See Thomas Hubbard, “Information, Decisions, and Productivity: On-Board Computers and 

Capacity Utilization in Trucking,” American Economic Review, vol. 

93, no. 4 (2003), pp. 1328–1353.

23. For more details, see Erik Brynjolfsson and Lorin Hitt, “Beyond 

Computation: Information Technology, Organizational Transformation and Business Performance,” Journal of Economic Perspectives, vol. 14, no. 1 (2000), pp. 23–48.

24. Ibid.
10 LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995

indicate a positive correlation between TFP growth in the 

late 1990s and IT investment several years earlier. A 2003 

paper by Susanto Basu and several coauthors, for example, linked TFP growth during the late 1990s with the 

rate of IT investment in the 1980s and early 1990s.26

More recently, Carol Corrado and her coauthors reported 

a similar relationship between IT investment in the late 

1990s and TFP growth after 2000.27 Not everyone 

agrees, however. Kevin Stiroh finds that the link between 

IT spending and TFP growth was weaker during the 

2000s than in the late 1990s.28

Studies that use firm-level data also support the idea that 

the post-2001 acceleration is related to IT spending during the late 1990s. Several report that the full benefits of 

investments in computers do not emerge for several years. 

For example, one study that relied on the results of a survey of more than 500 large U.S. businesses showed that 

the short-run rate of return on investments in computers 

is consistent with a normal rate of return on other investments. 29 The same paper showed that the productivity 

contribution of computers over longer periods—say, five 

to seven years—can be as much as five times greater, a 

result attributed to the payoff from the large investments 

in intangible capital, such as organizational redesign and 

business process reengineering, that often accompany 

investments in IT capital.

Analysts also have discovered that financial markets place 

a high value on companies that have made substantial 

investments in computers and other IT goods.30 The idea 

is that businesses must invest in new processes and training to reap the full benefits of computerization. Presumably, the companies that do so expect to increase future 

productivity and profits. If their spending on organizational capital represents the accumulation of intangible 

assets and if financial markets recognize the value of those 

assets, then the companies’ market value should reflect 

that. The high value placed on firms that have spent 

heavily on IT capital supports this interpretation, and 

there is evidence that U.S. industries with larger investments in IT undertake more substantial reorganizations, 

thus providing further support for the intangible-capital 

hypothesis.31

Despite that evidence, it is possible that the post-2001 

productivity surge was not a delayed response to the IT 

boom of the late 1990s. Rather, it could have a more 

general, macroeconomic, explanation: It could have 

evolved from increased competitive pressure attributable 

to globalization, for example, or deregulation, or businesses’ caution in hiring that stemmed from geopolitical 

uncertainty. 

Studies that closely examine individual businesses or 

industries suggest that competitive pressure is an important driver of productivity growth. Jose Galdon-Sanchez 

and James Schmitz, for example, describe a strong relationship between an increase in competitive pressure 

among iron ore mines in the early 1980s and later growth 

in labor productivity.32 In countries where competition 

was light, mines showed little increase in productivity; in 

countries with more competitive pressure, productivity 

gains were dramatic, with 50 percent to 100 percent 

increases by the end of the decade. Case studies, Martin 

Baily notes, show that productivity gains have diverse and 

25. Estimates vary, but the size of the stock of intangibles could be 

quite large, perhaps 10 times the stock of physical IT assets. See 

Erik Brynjolfsson, Lorin Hitt, and Shinkyu Yang, “Intangible 

Assets: Computers and Organizational Capital,” Brookings Papers 

on Economic Activity, vol. 1 (2002), pp. 137–181. For another estimate, see Carol Corrado, Charles Hulten, and Daniel Sichel, 

“Measuring Capital and Technology: An Expanded Framework,” 

in Carol Corrado, John Haltiwanger, and Daniel Sichel, eds., 

Measuring Capital in the New Economy (Chicago: University of 

Chicago Press, 2005), pp. 11–41.

26. See Susanto Basu and others, “The Case of the Missing Productivity Growth, Or Does Information Technology Explain Why Productivity Accelerated in the United States but Not in the United 

Kingdom?” in Mark Gertler and Kenneth Rogoff, eds., NBER 

Macroeconomics Annual 2003 (Cambridge, Mass.: MIT Press, 

2003), pp. 9–63.

27. See Corrado, Hulten, and Sichel, “Measuring Capital and 

Technology” (2005). 

28. See Stiroh, “The Industry Origins of the Second Surge of U.S. 

Productivity Growth.”

29. See Brynjolfsson and Hitt, “Computing Productivity.”

30. See, for example, Brynjolfsson and Hitt, “Beyond Computation,” 

and Brynjolfsson, Hitt, and Yang, “Intangible Assets.”

31. See Edward Wolff, “Productivity, Computerization, and Skill 

Change,” Economic Review, Federal Reserve Bank of Atlanta, 

vol. 87, no. 3 (2002), pp. 63–87. There is evidence that it is more 

productive for businesses to combine high organizational capital 

with high IT capital than it is to invest in large amounts of one or 

the other. See Timothy Bresnahan, Erik Brynjolfsson, and Lorin 

Hitt, “Information Technology, Workplace Organization, and the 

Demand for Skilled Labor: Firm-Level Evidence,” Quarterly Journal of Economics, vol. 117, no. 1 (2002), pp. 339–376.
LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995 11

idiosyncratic origins.33 He also argues that competitive 

pressure, which has increased steadily since the 1970s 

because of deregulation and globalization, appears to 

have been the catalyst.

Other suggestive evidence comes from a study of individual retail establishments. Lucia Foster and her coauthors 

concluded that virtually all productivity growth in retail 

arises through entry and exit, and there is essentially no 

role for productivity growth among continuing establishments.34 Specifically, they reported that almost all productivity growth in the U.S. retail trade sector between 

1987 and 1997 came in the entry of establishments with 

higher-than-average productivity effectively displacing 

exiting establishments with lower-than-average productivity. Their results suggest that IT investments—at least 

those made by continuing plants—were not the source of 

productivity growth in that sector of the economy. 

The argument that competition spurs productivity 

growth appears compelling. And it also seems clear that 

the degree of competitive pressure has increased since the 

1970s, when the U.S. economy was subject to more regulation and exposed to less competition from abroad. One 

problem with the competition argument is that it does 

not explain the abrupt rise in TFP growth after 2001. 

The decrease in regulation and the increase in globalization were gradual and would suggest a gentler increase in 

productivity growth than actually occurred.

Explaining the Lag in European 

Productivity Growth

Many European countries have productivity levels that 

are equal to or exceed that of the United States, and they 

have invested heavily in IT, but they have not shared in 

the productivity gains those investments produced in the 

United States. The divergence between productivity 

growth in the United States and in Europe since 1995 is 

difficult to explain—both economies had access to the 

same technology. Indeed, it seems that the difference in 

performance does not stem from the productivity performance of the IT-producing sectors. Raffaella Sadun and 

John Van Reenen report that the acceleration in Europe 

among IT-producing industries matched that in the 

United States.35 Instead, the difference comes from ITusing industries—while productivity growth in those 

industries has surged ahead in the United States, it 

appears to have slowed in most of Europe.

No single explanation has emerged for the difference in 

European and U.S. productivity growth. Most hypotheses, however, focus on differences in economic policies 

and institutions. U.S. labor markets tend to be more flexible than are those in Europe, a condition that presumably allows U.S. companies to reorganize work practices, 

to retrain (or transfer) workers, or to expand or contract 

as the market dictates. Some analysts argue that labor 

market rigidities prevent many countries in Europe from 

taking full advantage of IT investments because they 

inhibit the changes that are necessary to build intangible 

capital.36

Because product markets also are less regulated in the 

United States, competition is greater and there are fewer 

barriers to entry for new firms. Restrictions on land use 

in many European nations also limit the size of U.S.-style 

“big-box” retail stores, thus inhibiting competition, the 

development of efficient supply chains, and economies of 

scale.37

32. See Jose Galdon-Sanchez and James Schmitz, “Competitive 

Pressure and Labor Productivity: World Iron-Ore Markets in the 

1980s,” American Economic Review, vol. 92, no. 4 (2002), 

pp. 1222–1235. A similar effect has been shown for the concrete 

industry in the United States. See Chad Syverson, Market Structure and Productivity: A Concrete Example, Working Paper 10501 

(Cambridge, Mass.: National Bureau of Economic Research, 

May 2004).

33. See Martin Baily, “Recent Productivity Growth: The Role of 

Information Technology and Other Innovations” Economic 

Review, Federal Reserve Bank of San Francisco (December 2004), 

pp. 35–41. 

34. See Lucia Foster, John Haltiwanger, and C.J. Krizan, The Link 

Between Aggregate and Micro Productivity Growth: Evidence from 

Retail Trade, Working Paper 9120 (Cambridge, Mass.: National 

Bureau of Economic Research, August 2002).

35. See Raffaella Sadun and John Van Reenen, Information Technology 

and Productivity: It Ain’t What You Do It’s the Way You Do I.T.

Discussion Paper 2 (London: London School of Economics and 

Political Science, EDS Innovation Research Programme, October 

2005).

36. See Christopher Gust and Jaime Marquez, International Comparisons of Productivity Growth: The Role of Information Technology and 

Regulatory Practices, International Finance Discussion Paper 727 

(Washington, D.C.: Board of Governors of the Federal Reserve 

System, May 2002).
12 LABOR PRODUCTIVITY: DEVELOPMENTS SINCE 1995

However, competition appears to influence productivity 

growth in other industries as well. For example, after 

reviewing a sample of industrialized nations, analysts at 

the Organisation for Economic Co-operation and Development reported that countries with more restrictive 

product market regulations had slower rates of productivity growth over the 1978–2003 period than did those 

with more lenient rules.38 The authors focus on two 

channels to explain the inverse correlation. First, countries with more restrictive regulation of product markets 

generally had lower investments in IT, presumably 

because firms in those countries had less incentive to 

upgrade their capital stock with the latest technology. 

Second, countries with greater regulation had less foreign 

direct investment, which generally is thought to spur productivity growth because it introduces new foreign technology into the domestic economy and because it 

increases the number of competitors in domestic product 

markets.

Management practices also have been credited with the 

divergence in productivity. Companies that rely on strict 

centralized decision making generally are less productive 

and less able to exploit investments in IT capital than are 

their more decentralized counterparts.39 According to 

this view, one reason for the divergence is that U.S. companies mostly favor decentralized management structures. 

There also is evidence that multinational firms are more 

productive than are purely domestic firms and that U.S. 

multinationals are more productive than are those based 

in other countries.40 That condition does not appear to 

arise from differences in the quantity or quality either of 

capital or of labor. Instead, it appears that U.S. multinationals have better management practices than do their 

counterparts in Europe.

CBO’s Projections

CBO’s projection for potential GDP reflects the consensus that faster productivity growth after 1995 arose 

from developments in information technology, including 

technology advances and the boom in IT investment. 

CBO projects total factor productivity, an important 

input in the GDP estimate, by extrapolating the trend in 

TFP estimated from recent history. A key question is 

whether the rapid growth in TFP that has occurred since 

2001 indicates a change in the trend rate of growth. That 

is, should a forecast of TFP continue the 2.0 percent rate 

of growth since 2001? Should TFP instead be projected 

to grow at its pre-2001 rate? Or does the recent slowing 

in TFP growth suggest that the acceleration will reverse 

itself completely, with a period of below-trend growth 

that brings the series back to its pre-2001 trend line? The 

answers have important implications for the projection of 

real GDP.

In CBO’s judgment, the burst of IT innovation combined with the boom in IT investment during the late 

1990s and early 2000s permanently increased the level, 

but not the growth rate, of productivity in the nation’s 

economy. Although the faster pace of productivity 

growth is unlikely to persist indefinitely, it also seems 

unlikely that the gains of the past decade will be undone. 

Consequently, CBO projects that TFP will follow a middle path—the recent surge in TFP growth will not continue at the same rate, but neither will the surge be 

reversed. Instead, TFP is projected to grow at a rate that 

is close to its pre-2001 trend rate. 

37. See Robert Gordon, Five Puzzles in the Behavior of Productivity, 

Investment, and Innovation (2004). In a more recent paper, Gordon has tempered this interpretation somewhat in recognition 

that the European slowdown has affected industries across the 

board. See Robert Gordon and Ian Dew-Becker, “Why Did 

Europe’s Productivity Catch-Up Sputter Out? A Tale of Tigers 

and Tortoises” (paper prepared for the Federal Reserve Bank of 

San Francisco Center for the Study of Innovation and Productivity Conference, “Productivity Growth: Causes and Consequences,” San Francisco, November 18, 2005).

38. See Paul Conway and others, Regulation, Competition and Productivity Convergence, OECD Economics Department Working 

Paper 509 (Paris, France: Organisation for Economic Cooperation and Development, September 2006).

39. See Bresnahan, Brynjolfsson, and Hitt, “Information Technology, 

Workplace Organization, and the Demand for Skilled Labor.”

40. See Nick Bloom, Raffaella Sadun, and John Van Reenen, “It Ain’t 

What You Do It’s the Way That You Do I.T.—Testing Explanations of Productivity Growth Using U.S. Affiliates” (working 

paper, Centre for Economic Performance, London School of Economics, September 2005).