Technological Diffusion

The San Francisco Fed's Mark Doms discusses his work with Ethan Lewis on the adoption of technology, in this case the use of personal computers. An interesting result is that higher average educational attainment for a region results in more intensive adoption of personal computers and faster growth in wages:

The Diffusion of Personal Computers across the U.S., FRBSF Economic Letter: For the last fifteen years or so, ... there can be little doubt that the growing use of IT contributed significantly to the economy's performance, especially in the latter half of the 1990s, when output grew rapidly, unemployment declined to 25-year lows, productivity surged, and the inflation rate actually fell. A key question about IT's role in this performance is how its use spreads or diffuses throughout the economy. This Economic Letter focuses on a particular part of this question, ... the diffusion of the personal computer across U.S. businesses from 1990 to 2002. ...

Economies progress by adopting new technologies and using them both to produce existing goods more efficiently and to produce new goods. Furthermore, as economies become more efficient, the average wages of the economies also increase. Technologies that have transformed the economy in significant ways include the steam engine, the internal combustion engine, and electrification. These are sometimes called "general purpose" technologies because they are used in many parts of the economy .... One of the most recent general purpose technologies is the computer, and more specifically, the personal computer.

Studies have shown that new technologies typically do not spread throughout the economy in an even, uniform manner. Instead, ... certain areas within a country embrace a new technology first, while other areas take up the technology much later. ... Doms and Lewis examine how the personal computer diffused throughout the U.S. economy from 1990 to 2002. Using a data set that reports technology use for hundreds of thousands of business establishments, the authors document the extent to which the intensity of use of personal computers (as measured by personal computers per 100 employees) varied across 160 metropolitan areas around the country. ...

The study found that in 1990, the San Francisco Bay Area was the most computer-intensive area in the country. Because the Bay Area is also home to many IT producers, this finding raises the question of whether one area may be more computer-intensive than another primarily because of the industries located in that area. For instance, the finance and high-tech industries are the most IT-intensive, regardless of location. Therefore, if an area has a large financial industry (like New York) or a high-tech center (like the Bay Area...), then that area might also be more computer-intensive than an area such as Hickory, N.C., where a larger share of the economy is based on furniture manufacturing (an industry that is not very IT-intensive).

The authors calculate computer-intensity measures that account for industry composition and still find very large and persistent differences across metropolitan areas in their computer usage in 1990 and again in 2002. Among others, the San Francisco Bay Area ranks very high, even after controlling for the industries located there.

Some of those results are highlighted in Figure 1. The figure shows how many computers are used per 100 workers in 1990 and in 2002 relative to the San Francisco Bay Area after controlling for the industry composition of each area. ... The relative positions of metropolitan areas were consistent over time... The results in Figure 1 raise the question of why San Francisco might be out in front of most regions while others are so far behind. ...[T]wo factors ... appear to be particularly important: the human capital of an area (as measured by education) and the degree to which the area is an IT center and therefore generates spillovers to other industries in the area.

Economists have frequently examined the role human capital plays in technology diffusion. Economies with highly educated workers may be more adept at learning about new technologies and may also be better able to put those technologies to productive use.

Doms and Lewis address the question of causation: Does computer adoption affect the education level of the workforce or does the education level of the workforce affect computer adoption? Using several approaches, Doms and Lewis find strong evidence that the education level of the workforce results in higher rates of computer adoption. ... As shown in Figure 2, cities with a higher share of the workforce that has completed 16 years or more of education ... in 1990 are also cities that had high rates of computer adoption by 2002.

Another reason for differences between metropolitan areas ... is that some benefit from the presence of a strong IT-producing sector... These benefits are called "spillover effects." For example, people who work in ... high-tech firms may move to low-tech firms nearby, taking knowledge about new technologies ... with them. Also, employees at low-tech firms may learn about the virtues of computers from interacting with community members who hold high-tech jobs. Spillover effects differ from industry effects because they increase computer use in all local industries... Doms and Lewis find evidence consistent with spillovers... However, the importance of these spillovers seems to be much less important in explaining cross-area differences in computer adoption than the overall level of education. ... [A]reas that successfully adopt technologies tend to have superior economic performance. Consistent with this, Doms and Lewis find that areas that were computer-intensive in 1990 were also areas that enjoyed faster real wage growth for college-educated workers, and, to a lesser degree, for workers with less than a college education.  ...