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.