A Productivity Payoff From New Machinery

While many economists and policymakers are convinced of the importance of investing in human capital, investment in machinery remains a critically important route to improving productivity. Numerous recent academic studies have made this point; now a regional study by economists at the Federal Reserve Bank of Chicago demonstrates that the recent takeoff in Midwest manufacturing productivity can be traced directly to significant modernization efforts in several key industries.

In the early 1980s, the region responded to competitive pressure by closing old plants and retiring its least productive capital. This downsizing typically gives productivity an immediate kick but provides no basis for sustained improvement. By the latter half of the decade, though, Midwest manufacturers began a push to invest in new equipment and machinery. In fact, between 1986 and 1990, economists at the Chicago Fed say, average capital expenditure per worker in the Midwest was 9% above the level elsewhere in the nation.

And while the region contains a high proportion of capital-intensive industries, notably autos and steel, the authors of the study found that the difference between investment per worker in the Midwest and in the rest of the nation "does not appear to be due to difference in industrial mix." For instance, between 1986 and 1990, investment per worker in transportation was 16% higher in the Midwest than in the same sector elsewhere, while in primary metals, it was 22% higher on average. Manufacturers in the region improved efficiency by 8% more than corresponding sectors in the rest of the nation. "Given the capital-intensive nature of most Midwest industries and their relative maturity, such a gain is substantial," the authors say.