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Solow tells British audience that six industries were key to US boom

"A mere six out of 59 industries contributed essentially all of the acceleration of productivity" from 1987-95 leading to "the fantastic US boom of 1995-2000," Institute Professor Emeritus Robert M. Solow of economics told an audience of British and American leaders last Thursday.

Solow and Cambridge University economist Robert Rowthorn analyzed the US and British economies at the Cambridge-MIT Institute (CMI) Summit meeting celebrating the CMI partnership formed two years ago between Cambridge University and MIT.

"What distinguished 1995-2000 from other periods was not the mere existence of a small group of industries whose productivity growth rates jumped--that is common--but the fact that the industries in question were big employers," Solow said.

"The importance of a particular industry depends on both the size of its jump in productivity growth and on its share of total employment. Looked at this way, a mere six out of 59 industries contributed essentially all of the acceleration of productivity from 1987-95 to 1995-2000. The other 53 industries included some positive and some negative (i.e., decelerating) industries, but netted out to zero.

"I do not think you would guess the identities of the three largest contributors to the productivity surge: they were, in order, wholesale trade, retail trade, and security and commodity brokers," Solow said.

He said the contribution of the three largest industries was almost three times the size of the contribution of the next three, "which were more expectable: electronic and electric equipment (i.e., semiconductors), industrial machinery and equipment (i.e., computers), and telecommunications."


In wholesaling, warehouse centralization and automation were the most important, Solow said. The key factors were really managerial innovations in the organization of functions, some of them made possible by increases in scale. It appears that the whole process was forced by pressure from large retailers, he said.

"In retailing, the story is similar, and even more closely traceable. It can be summed up in the Wal-Mart phenomenon. Wal-Mart opened up an enormous productivity gap over the rest of the industry, which was then forced to imitate in order to survive. (It has not caught up yet, which suggests that there may be rapid productivity growth still to come.) The Wal-Mart advantage owed something to IT [information technology], but again not to anything new or exotic. However, most of Wal-Mart's innovation was managerial, especially the large-store format and improved logistics," Solow said.

Solow, who won the Nobel Prize in economics in 1987, concluded that overinvestment in information and communications technology helped trigger the current recession. IT technologies deserved some credit for the 1995-2000 boom, but not as much credit as they've received.


Solow said the economic slowdown had already begun by the middle of 2000, and a standard recession was probably already in the cards well before the attack on the World Trade Center. Its cause was classical: businesses perceived that they had overinvested in IT equipment and began to pull back, despite continued high consumer spending. "The situation was pretty clearly worsened by the extra uncertainty imposed on both consumers and firms by the events of Sept. 11 and after," he said.

"If you look at a lot of different industries, and compare their productivity growth rates with the extent of their investment in IT, you find a positive correlation across industries. The correlation is not terribly close or sharp, but it is there."

Looking ahead at the next five years, Solow said, "One might look forward to productivity gains of 2 percent a year, after cyclical effects are washed out. That is significant acceleration, if not the stuff that hype is made of.

"Keep in mind that five-year extrapolation makes some sense precisely because it is too short a timespan for brand-new, as-yet-undiscovered technologies to play a role. I have no idea about that, but then neither does anyone else," he added.


Professor Rowthorn of Cambridge University examined Britain's low productivity compared to the United States.

In services, on an hourly basis, the productivity gap is probably in the region of 20 percent, even though Britain's "export performance in knowledge-based services has been impressive."

In manufacturing, Rowthorn said, "the average American manufacturing worker now produces about twice as much as his or her British counterpart."

The British economist further noted that "American firms now produce more than twice as much output with the same number of workers as they did in 1973, whereas British firms produce almost the same as before with only half as many workers. Productivity growth in the UK has been almost entirely of the labor-shedding variety. This has perhaps been the greatest failing of our economy and may be the area where we have the most to learn from the American experience."

A version of this article appeared in MIT Tech Talk on November 7, 2001.

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