Automation, Productivity and Innovation in Information Technology

The rate of innovation in Information Technology (IT) has slowed down over time. The slowing down is evident from the data on quality adjusted price index of computers as well as the data on performance of microprocessors used in computers. The model in this paper shows that an IT-labor elasticity of substitution that is greater than one can explain the slowdown in innovation in IT. With an IT-labor elasticity of substitution that is greater than one, however, slowing innovation can result in sustained labor productivity and output growth in IT using firms and the IT using sector of the economy. Sustained growth is possible because the an IT-labor elasticity of substitution greater than one results in a continuously increasing share of IT in production costs, and the increasing IT share counteracts the effect of slowing innovation on labor productivity and output growth. In this environment of slowing innovation, increasing IT share and sustained growth, employment in the IT using sector of the economy can increase or decrease, depending on the values of the IT-labor elasticity of substitution and the price elasticity of demand for IT enabled consumption goods