UNIVERSITÄT POTSDAM - Prof. Dr. Paul JJ Welfens

the presence of relative price changes – for real GDP measurement showed that real
GDP growth had to be slightly revised downwards. At the same time the introduction
of hedonic pricing which takes into account quality improvement – highly significant in
the ICT sector (especially in the case of computers) – brought an upwards revision of
real GDP. One can only wonder why Eurostat is not making similar adjustments in its
SNA procedures.
We now turn to the analysis of output growth on the basis of factor inputs and
total factor productivity (TFP) growth. The US recorded in some years two-digit
growth rates of total factor productivity growth in the 1990s. Overall TFP is the
weighted sum of sectoral TFPs, that in our case is of two sectors; here αi (i=1,2) is the
share of nominal sector 1 output relative to overall nominal output.
(V) TFP = α1 TFP1 + α2 TFP2
In a simple growth model based on a production function VF(K,L,Z,Q) with inputs
capital K (without computers), labor L and computers Z we can decompose output
growth as follows where we use EY,X to denote partial output elasticities:
(V.I) gY = EY, K g K + EY,LgL + EY,Z gZ + gV; here gV= TFP
(V.II) gY = EY, K g K + EY,LgL + EY,Z gZ + α1 TFP1 + α2 TFP2
The input factor computer is a proxy for ICT goods used as inputs in firms. Total
factor productivity growth in the ICT sector has been enormous in the 1990s in the
US and is expected to remain high; while the EU also has had an increase in productivity
growth in ICT it is unlikely that West European countries will be on par with the
US. It is true that Sweden, Finland, Ireland and some regions in Germany and France
have a dynamic ICT industry, but global industry leaders clearly are firms from the US
which also spend more than twice as much as the Europeans on software (OECD,
1998). While it is unlikely that the US lead in ICT will continue forever, it might well
maintain a considerable lead over several decades.
Next we turn to the issue of heterogeneous labor; that is, we will distinguish between
unskilled labor L and skilled labor H. The substitution elasticity of L and H with
respect to computers is crucial, and here again we might find differences in the US and
Europe. However, even if the substitution elasticity in the US would be higher than in
the EU high investment in ICT would not necessarily mean a rise of unskilled unemployed
in the US. The crucial question is whether the labor market is flexible enough to
transitorily allow wage rates of unskilled labor to fall – with employment growth and
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