Early Twentieth Century Productivity Growth Dynamics: An Inquiry into the Economic History of Our Ignorance

A marked acceleration of total factor productivity (TFP) growth in U.S. manufacturing followed World War I. This development contributed substantially to the absolute and relative rise of the domestic economys aggregate TFP residual, which is observed when the growth accounts for the first quarter of the twentieth century are compared with those for the second half of the nineteenth century. Two visions of the dynamics of productivity growth are germane to an understanding of these developments. One emphasizes the role of forces affecting broad sections of the economy, through spillovers of knowledge and the diffusion of general purpose technologies (GPTs). The second view considers that possible sources of productivity increase are multiple and idiosyncratic. Setting aside possible measurement errors, the latter approach regards sectoral and economy-wide surges of TFP growth to be simply the result of aggregating over many essentially independent underlying cost reductions, some of which carried more weight than others. Although there is room for both views in an analysis of the sources of the industrial TFP acceleration during the 1920s, we find the evidence more compelling in support of the first approach. The proximate source of the TFP surge lay in the switch from declining or stable capital productivity to a rising output-capital ratio, which occurred at this time in many branches of manufacturing, and which was not accompanied by slowed growth in labor productivity. The 1920s saw critical advances in the electrification of industry, the diffusion of a GPT that brought significant fixed capital-savings. But the same era also witnessed profound transformations in the American industrial labor market, following the stoppage of mass immigration from Europe; rising real wages provided strong impetus to changes in workforce recruitment and management practices that were underway in some branches of the economy before the War. The productivity surge reflected the confluence of these two forces.