Fact of the Week: An Increase in ICT Industries’ Share of Output Raises Labor Productivity
Source: Marko Družić and Tomislav Gelo, “The Effect of ICT on Productivity in Transition and Developed EU Members,” Proceedings of Economics and Finance Conferences, International Institute of Social and Economic Sciences, no. 14115901 (September 2023).
Commentary: A discussion paper from September 2023 by Marko Družić and Tomislav Gelo analyzed the role of information and communication technology (ICT) sectors on productivity in the European Union (EU). The authors looked at industry-level data across 23 EU member countries between 1995 and 2020. Industries were classified using the NACE revision 2 classification system. They distinguished computer and electronics manufacturing (C26), telecommunications (J61), and computer and IT services (J62-J63) as the industries that make up the bulk of ICT-related activities. The authors used those industries’ share of total value added to construct their variable of interest for ICT activity. They also defined labor productivity as value added per worker. The study’s findings suggest that ICT sectors have a positive association with a country’s productivity.
The authors found that, overall, ICT’s share of value added has a positive relationship with labor productivity among EU regions. In particular, the authors were interested in two particular groupings of countries. The first group consisted of 12 western EU countries, namely Belgium, Denmark, Germany, Greece, Spain, France, Italy, Netherlands, Austria, Finland, Sweden and Portugal. The second group consisted of 11 central and eastern EU countries, namely Bulgaria, Czechia, Estonia, Croatia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia and Slovenia. While ICT’s share of value added was positively related to labor productivity, the effect was larger for western EU countries. In particular, a 1 percent increase in ICT’s share of value added was associated with a 0.14 percent increase in labor productivity among western EU countries. At the same time, a 1 percent increase in ICT’s share of value added was associated with a 0.06 percent increase in labor productivity among the central and eastern EU countries.
The authors noted several other findings in their results. For instance, in both of the aforementioned regions, government spending as a share of GDP was negatively associated with labor productivity. Additionally, GDP per capita did not have a statistically significant relationship with productivity in either region. Interestingly, total investment’s share of GDP did not have a statistically significant relationship with labor productivity in the western EU countries, but was positively associated with labor productivity in the central and eastern EU countries. The authors attributed that to the fact that some of the eastern EU countries are somewhat less developed than western EU countries, and are thus still able to realize meaningful productivity gains from non-ICT investments. By contrast, they argue that the western EU countries are at the point in their development where their productivity growth arises primarily from ICT-related industries.
