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 this is because of the 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 in just a subset of sectors may create bottlenecks and fail to translate into commensurate aggregate productivity gains. Using data on input-output linkages, citation linkages, industry productivity growth and patenting, we find evidence in support of this hypothesis: the variance of supplier TFP 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 US and several other industrialized economies can be accounted for by the sizable increase in cross-industry variance of TFP growth and innovation. For example, if the TFP growth variance had remained at the same level as between 1977 and 1987, the US manufacturing productivity would have grown twice as fast in 1997-2007 as it did, reaching a higher level of growth than in 1977-1987 and 1987-1997.