Blue Screen of Death? Obsolescence and Structural Change in the Computer Age

Abstract

The rising capital income share and declining productivity growth have been welldocumented facts of recent years. This paper argues that one of the forces behind these trends is the evidence-based high obsolescence rates of computer technologies, namely hardware and software, widely used in many types of machines. Using an endogenous growth model calibrated to U.S. data, I show that faster technological obsolescence of machines could be responsible for roughly 30 percent of the observed decline in the productivity growth and all of the observed increase in the capital share. The results suggest that the short technology life-cycle reduces not only the efficiency of capital but also the efficiency of labor indirectly via labor-capital complementarity in final output production, resulting in a decline in the long-run productivity growth. In addition, scarce resources are increasingly allocated to capital augmentation to recoup tech obsolescence. Therefore, the share of income going to capital increases.

Keywords: Technological Obsolescence, Productivity Growth, Capital Income Share