Why Did U.S. Market Hours Boom in the 1990s?

During the 1990s, market hours in the United States rose dramatically. The rise in hours occurred as gross domestic product (GDP) per hour was declining relative to its historical trend, an occurrence that makes this boom unique, at least for the postwar U.S. economy. We find that expensed plus sweat investment was large during this period and critical for understanding the movements in hours and productivity. Expensed investments are expenditures that increase future profits but, by national accounting rules, are treated as operating expenses rather than capital expenditures. Sweat investments are uncompensated hours in a business made with the expectation of realizing capital gains when the business goes public or is sold. Incorporating expensed and sweat equity into an otherwise standard business cycle model, we find that there was rapid technological progress during the 1990s, causing a boom in market hours and actual productivity. ∗An earlier version of this paper circulated under the title “Expensed and Sweat Equity.” The authors thank the National Science Foundation for financial support and seminar participants at the SED conference, NYU, the Federal Reserve Banks of Minneapolis and Dallas, UT Austin, UCSD, UWO, UQAM, the Bank of Canada, and the University of Miami. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. During the 1990s, market hours in the United States increased dramatically. A possible explanation for the rise is that the 1990s were a period of rapid technological progress. But if that were so, then productivity—defined as GDP per hour worked—should have boomed as well. In fact, productivity fell relative to trend in the decade. The question then is why, unlike in all U.S. postwar booms, did market hours boom in the 1990s while productivity did not? One possibility is that some factor other than improvements in production efficiency was responsible for the dramatic increase in hours and the lackluster productivity growth. Another possibility is simpler, that there is a measurement problem. We find that at least the latter is true: there is a problem in measuring output growth, which in turn affects the measure of productivity growth. The source of this problem is unmeasured intangible investment, which increased dramatically during the 1990s. We test this hypothesis, and our test results support it. We find that properly accounting for these investments changes the picture of the 1990s dramatically: U.S. productivity did in fact boom along with market hours during the period. We focus on two specific types of intangible investment that are not included in the national accounts. One is expenditures financed by owners of capital which, by national accounting rules, is expensed rather than capitalized. Examples of this type include research and development (R&D), advertising, and investments in building organization capital. The other type of intangible investment we consider is sweat, investment financed by worker-owners who allocate effort and time to their business and receive compensation at less than their market rate. This type of investment is made with the expectation of realizing future profits or capital gains when the business goes public or is sold. There is compelling evidence that both of these types of unmeasured investment were abnormally high in the 1990s. Rapid technological advancements were being made in industries that are relatively intensive in producing intangible capital, such as those related to information technology (IT). According to Doms (2004), two notable pieces of evidence 1 A common misperception is that growth in GDP per hour was high during the 1990s. This misperception is based on high productivity growth rates found in some industries.