Economic Report President

productivity; the latter is in turn broken down into changes in laborquality, changes in the quantity and quality of capital, and changes inmultifactor productivity. Between 1990 and 1996 (the last year forwhich the breakdown is officially tabulated), labor productivity in privatebusiness increased at an average rate of 1.1 percentage points peryear. Improvements in labor quality accounted for 0.4 percentagepoint, and capital deepening contributed about 0.4 percentage point.(In comparison, capital deepening contributed 0.7 percentage point tomultifactor productivity growth between 1979 and 1990. Althoughgross business fixed investment has increased significantly as a shareof GDP during the past 6 years, it represented a smaller share of GDPon average between 1990 and 1996 than between 1979 and 1990. Netbusiness fixed investment, which determines the change in the businesscapital stock, was also a smaller share of GDP on average duringthe later period.) Gains in multifactor productivity represented theremaining 0.3 percentage point of labor productivity growth, part ofwhich may be related to capital investment, although such an effect isdifficult to quantify.Some observers are surprised that the torrid pace of computerinvestment has not had a more apparent effect on productivity growth.As noted earlier, much of the acceleration in measured labor productivityduring the past 3 years may owe to methodological changes andcyclical dynamics rather than fundamental advances such as theincreasing use of computers. One factor limiting the impact of theinformation technology revolution on productivity is the relativelysmall share of this type of capital: computers and peripheral equipmentstill represent less than 5 percent of the total net stock of equipmentand less than 2 percent of net nonresidential fixed capital. Andthe small base of computer capital means that many years of briskinvestment would be needed before computers could represent anappreciable part of the capital stock.Even so, computers could have a large effect on productivity if therate of return to computer capital were especially high. In conventionalgrowth accounting, such as the calculations made by the Bureau ofLabor Statistics, unusually high returns to computers would appear ashigher multifactor productivity. However, measured multifactor productivityhas not increased especially rapidly during the 1990s. Measurementerror could play a role here, as a substantial part of the outputof computers is intangible and may not be captured in the nationalincome accounts. Yet mismeasurement of output has been a perennialproblem for national income accounting, and whether this problem isworse in the computer age is not clear.More fundamentally, the full benefits of the dramatic advance ofcomputer technology may still lie ahead of us. Economic historianPaul David has compared the computer revolution to the transition toelectric power in the late 19th and early 20th centuries. He noted that75