Sources of the German Productivity Demise – Tracing the Effects of Industry-Level ICT Investment

While the US experienced two successive labor productivity surges in 1995 and 2000, Germany’s productivity declined dramatically during the same period. We examine the sources of Germany’s productivity demise using the ifo industry growth accounting database that provides detailed industry-level investment information. While much attention has focused on the reduction in German labor hours, our data show that Information, Communication and Technology (ICT) investment in Germany was deeply lacking in the mid 1990’s as compared to the US. The transition to the new economy mitigated the German productivity slowdown, but did not reverse it. After 2000, we find that a recovery in Non-ICT investment was offset by a widespread collapse in German total factor productivity. Over half of German industries (accounting for almost 50 percent of German output) experienced negative TFP growth. This second major difference between the US and German industry performance explains Germany’s secular departure from the technological frontier.