Oxford Economics 28 Sep 2018 11:00am

How digital is driving US economy

The digital economy is a key and growing driver of US growth, employment, wages and productivity, and it acts as an important restraint on inflation

The digital economy is a bright spot for the overall US economy, accounting for at least 6.5% of nominal GDP in 2016. To provide some perspective, this is a higher share than many traditional sectors, such as retail trade (5.9%) or construction (4.3%). The digital economy is also growing much faster than the overall economy. Over the past decade, it has grown at an average annual rate of 5.7%, significantly faster than the average 1.5% pace of the overall economy.

The digital sector has consistently contributed more to economic growth than its share of the economy: in 2016, the real digital economy accounted for almost one-third of the overall US expansion (or 0.5ppt of the 1.6% GDP growth that year). Importantly, it appears less susceptible to economic downturns, and it helped mitigate the last recession.

Among the main contributors to the digital economy, the largest components are support services and telecommunications, which together accounted for more than half of total digital value added in 2016. Digital goods such as computer hardware and software accounted for only 11% and 21%, respectively. The share of ecommerce has increased from 7.6% in 2006 to 11.6% in 2016, consistent with the growing importance of e-commerce retail sales such as Amazon and other online retailers.

In 2016, services accounted for nearly 90% of total digital value added and 5.7% of total GDP. The growth of digital services value added significantly outstripped that of digital goods. The predominance of services is also apparent when looking at the industry breakdown of digital value added. The main sectors driving the digital economy include IT, professional and business services, manufacturing and retail trade.

The digitalisation of the economy has changed consumer markets and price-setting behaviours. As prices in traditional sectors of the economy have tended to increase, prices in the digital sector have declined. We estimate that lower prices for digital products and services have produced a drag of about 0.1ppt per year on CPI inflation from 2011 to 2017.

Digital price deflation is likely understated, not only because of the limited scope of the available data, but also because official price statistics fail to capture the new dimension and fast diffusion of new digital products and services. In a recent study on the impact of the internet on price dynamics, Goolsbee and Klenow (2018) compared overall inflation to online inflation (using big data) for the same categories of products. They found that during 2014-2017, online inflation was 1.3ppt lower per year than overall inflation.

The impact of digitalisation on inflation takes centre stage in the debate about how GDP can underestimate technologies’ economic effects and is particularly relevant for the assessment of the Federal Reserve’s monetary policy stance. In a recent speech, Fed chairman Jay Powell argued that Amazon may be one factor holding back inflation.

Digitalisation is also having wide-ranging effects on labour markets, from the concerns about job destruction and the displacement of workers to the emergence of new and more specialised occupations. While these new dynamics are difficult to capture, the latest data indicate that the digital economy has created jobs at a faster pace than the rest of the economy. From 2011 to 2016, employment in the digital economy has grown at an average pace of 3.7% versus 1.7% for overall employment growth. In addition, digital jobs accounted for nearly 4% of total US employment in 2016. Not surprisingly, digital employment growth has been driven by the services sector, which accounted for over 80% of total digital employment in 2016. Job creation was concentrated in the broadcasting and telecommunications sectors as well as in the computer systems design and related services sectors.

Not only is the US digital economy creating twice as many jobs as the rest of the economy, but compensation is also higher and wage growth faster, averaging a sizeable 5.0% during this cycle.

Employees working in the digital economy earned an average of $115,000 in 2016, almost double the $66,000 average wage for other employees. This suggests that an employee in the digital economy is much more productive than the average employee. Indeed, productivity in the digital economy has grown twice as fast as the rest of the economy during the last five years.

Lydia Boussour is a senior US economist