Technological advance and productivity growth in the US Engineering and Scientific Instrument Industry: adjustment for unmeasured performance change in semiconductor inputs

This paper analyzes the tremendous advance of technology and rapid growth of productivity in the US Engineering and Scientific Instrument Industry (SIC 3811). The existence and the effect of unmeasured input quality change in the official price index are explored. Semiconductors and electronics are identified as the major input components that contain substantial unmeasured input quality changes. A method that incorporates the total factor productivity (TFP) growth in the semiconductor and electronics industry into the cost structure of the instrument industry is used to adjust for the semiconductor prices. As expected, the productivity growth in the instrument industry is overestimated with the existence of unmeasured input quality improvement. (This effect might be smaller or even reversed if account is taken of quality change in the output of scientific instruments.) The results have strong implications for national science and technology policies: the semiconductor industry lies at the core of quality change and productivity advances in other industries as well, particularly in the computers and telecommunications equipment industries where the downstream effects have been measured.