Bottlenecks: Sectoral Imbalances and the US Productivity Slowdown

Despite the rapid pace of innovation in information and communications technologies (ICT) and electronics, aggregate US productivity growth has been disappointing since the 1970s. We propose and empirically explore the hypothesis that slow growth stems in part from an unbalanced sectoral distribution of innovation over the last several decades. Because an industry’s success in innovation depends on complementary innovations among its input suppliers, rapid productivity growth that is concentrated in a subset of sectors may create bottlenecks and consequently fail to translate into commensurate aggregate productivity gains. Using data on input-output linkages, citation linkages, industry productivity growth and patenting, we find evidence consistent with this hypothesis: the variance of suppliers’ Total Factor Productivity growth or innovation adversely affects an industry’s own TFP growth and innovation. Our estimates suggest that a substantial share of the productivity slowdown in the United States (and several other industrialized economies) can be accounted for by a sizable increase in cross-industry variance of TFP growth and innovation. For example, if TFP growth variance had remained at the 1977-1987 level, US manufacturing productivity would have grown twice as rapidly in 1997-2007 as it did—yielding a counterfactual growth rate that would have been close to that of 1977-1987 and 1987-1997.