Patented Productivity

An analysis of new patent trends shows how productivity has increased in the U.S. over 200 years.
Patented Productivity

WHAT DRIVES PRODUCTIVITY across firms and sectors? Is it innovation and technology, or something else? That question motivated three finance professors to work with an Amazon executive to explore how productivity has increased in the U.S. over the past two centuries even as the workweek has grown shorter and production has become less capital-intensive.

The research was produced by Bryan Kelly of the Yale School of Management in New Haven, Connecticut; Dimitris Papanikolaou of Northwestern University’s Kellogg School of Management in Evanston, Illinois; Amit Seru of Stanford University’s Graduate School of Business in California; and Matt Taddy of Amazon. They measured the innovativeness of each patent by comparing how similar it was to earlier and later ones— reasoning that innovative ones would be unlike the ones that came before.

“For example,” Papanikolaou says in an article on Northwestern’s website, “the first patent that mentions the word ‘electricity’ is going to be important. The thousandth patent that does this, less so.” In addition, when patents represent breakthrough innovation, later inventions build upon them and use similar descriptions. Using these distinctions, the researchers could give higher quality scores to patents that were dissimilar from previous ones but similar to later ones.

By analyzing the text of more than nine million patents filed in the U.S. since 1836, the researchers found that periods defined by a high number of innovative patents were followed by periods of high productivity growth.

In fact, innovative patents matched the time frames for three eras of U.S. technological progress: railroad expansion and the birth of electricity in the late 19th century, the development of chemicals and synthetic plastic in the 1930s, and the tech and communications boom of the 1990s.

The link between innovation and productivity held across sectors. For example, during periods when a given sector saw 30 percent more innovation than average, that sector might enjoy up to 11 percent higher productivity. Individual firms also benefited: Companies that filed innovative patents could realize 5 percent greater profitability in the future.

According to Papanikolaou, “Now we can use this measure to explore other patterns, such as how much productivity is driven by changes in technology versus regulatory changes, shifts in market power, or other factors.”

The NBER working paper “Measuring Technological Innovation over the Long Run” was issued in November 2018.