Evaluating the Australian ICT Input Substitution and Productivity Effects

Abstract

This paper studies the effects of ICT on production and productivity. Using a Transcendental Logarithmic (translog) variable cost function model, our empirical study analyses ten major industries across the Australian economy from 1975-2002, where labour and ICT capital are considered to be variable inputs and non-ICT capital the quasi-fixed factor input. The regression results were then used to derive price elasticity of substitution between labour and ICT capital. The own and cross price elasticity allowed us to investigate the impact of ICT on the production structure. The results suggest that input substitution effect is present in all our industries except the a??communicationsa?? industry that had continuous but declining labour and ICT complementarity relationships, throughout the period of analysis. As for the ICT own-price elasticity of substitution, the service sector had a neutral relationship, where the price of ICT has almost a negligible effect on ICT demand. The non-service sector has positive own-price elasticities in our sample and again, the COMM industry was the exception that suggess a fall in ICT demand when its own price increased. Short-run primal and dual productivity effects were then measured. Our productivity measures are not measures of multifactor productivity (MFP) or spillover and network effects, but are strict output growth and input cost reduction annual estimates. Those industries that displayed positive productivity effects were also the same industries that embarked on early ICT capital accumulation from the seventies.