Effects of technological improvement in the ICT producing sector on business activity
Abstract
It seemsto be taken for granted by many commentators that the sharp decline in pricesof computers, telecommunications equipment and software resulting from thetechnological improvements in the information and communications technology(ICT)-producing sector is good for jobs and is a major driving force behind thenon-inflationary employment miracle and booming stock market in the latter halfof the nineties in the U.S. and their recurrence since 2004. We show that, inour model, a technical improvement in the ICT-producing sector by itself cannotexplain a simultaneous increase in employment and a rise in firms' valuation(or Tobin's Q ratio). The key to generating a booming stock market alongsideemployment expansion is to hypothesize that when technical improvement in theICT-producing sector occurs, the market forms an expectation of futureproductivity gains to be reaped in the ICT-using sector. Then we can explainnot only the stock market boom and associated rise in investment spending andemployment in the period 1995-2000 but also the subsequent decline inemployment, in Tobin's Q and in investment spending in 2001, with consumptionholding up well as productivity gains in the ICT-using sector were realized. Ananticipation of a future TFP improvement in the ICT-using sector can once moreplay the role of raising the stock market.