To understand the economic value of computers, one must broaden the traditional definition of both the technology and its effects. Case studies and firm-level econometric evidence suggest that: 1) organizational "investments" have a large influence on the value of IT investments; and 2) the benefits of IT investment are often intangible and disproportionately difficult to measure. Our analysis suggests that the link between IT and increased productivity emerged well before the recent surge in the aggregate productivity statistics and that the current macroeconomic productivity 2 Computers and Economic GrowthHow do computers contribute to business performance and economic growth?Even today, most people who are asked to identify the strengths of computers tend to think of computational tasks like rapidly multiplying large numbers.Computers have excelled at computation since the Mark I (1939), the first modern computer, and the ENIAC (1943), the first electronic computer without moving parts. During World War II, the U.S. government generously funded research into tools for calculating the trajectories of artillery shells. The result was the development of some of the first digital computers with remarkable capabilities for calculation --the dawn of the computer age.However, computers are not fundamentally number crunchers. They are symbol processors. The same basic technologies can be used to store, retrieve, organize, transmit, and algorithmically transform any type of information that can be digitized --numbers, text, video, music, speech, programs, and engineering drawings, to name a few. This is fortunate because most problems are not numerical problems. Ballistics, code breaking, parts of accounting, and bits and pieces of other tasks involve lots of calculation.But the everyday activities of most managers, professionals, and information workers involves other types of thinking. As computers become cheaper and more powerful, the business value of computers is limited less by computational capability, and more by the ability of managers to invent new processes, procedures and organizational structures that leverage this capability. As this form of innovation continues to develop, the applications of computers are expected to expand well beyond computation for the 3 foreseeable future.The fundamental economic role of computers becomes clearer if one thinks about organizations and markets as information processors (Galbraith, 1977;Simon, 1976; Hayek, 1945). Most of our economic institutions and intuitions emerged in an era of relatively high communications costs, limited computational capability, and related constraints. Information technology (IT), defined as computers as well as related digital communication technology, has the broad power to reduce the costs of coordination, communications, and information processing. Thus, it is not surprising that the massive reduction in computing and communications costs has engendered a substantial restructuring of the economy.The majority of modern industries a...

three anonymous reviewers and participants at numerous seminars for valuable comments. We also thank executives at the firms in our sample for their participation and for valuable discussions. This research has been generously supported by the Center for Coordination Science and the Center for eBusiness at the Massachusetts Institute of Technology, the National Science Foundation ABSTRACTWe investigate the hypothesis that the combination of three related innovations, 1) information technology (IT), 2) complementary workplace reorganization, and 3) new products and services, constitute a significant skill-biased technical change affecting labor demand in the United States. Using detailed firm-level data, we find evidence of complementarities among all three of these innovations in factor demand and productivity regressions. In addition, firms that adopt these innovations tend to use more skilled labor. The effects of IT on labor demand are greater when IT is combined with the particular organizational investments we identify, highlighting the importance of IT-enabled organizational change.1

Technology, wage inequality and the demand for skilled laborOver the past two decades, wage inequality has grown significantly in the UnitedStates. The total effect has been large, as the gap between wages at the 75th percentile of the distribution and the 25th has increased by nearly 50 percentage points. 1 The total effect has also been widespread, shifting relative wages in the top, middle, and bottom of the income distribution. The main cause of the growth in inequality appears to be a shift in the demand for workers of different kinds. Demand is growing for workers with exceptional talent, training, autonomy, and management ability much faster than for workers in low and middle-wage occupations.Parts of this shift in labor demand are explained by such broader economic patterns as globalization, sectoral shifts in employment and changes in labor marketinstitutions. Yet these forces appear too small to explain the breadth and depth of the shift, leaving a large residual shift (Krugman and Lawrence, 1993). Economists have concluded that this residual must reflect a "skill-biased technical change" in the way goods and services are produced in the economy (Griliches, 1969;Berndt, Morrison and Rosenblum, 1992;Berman, Bound and Griliches, 1994). The nature of this technical change are still not well-understood, but its size, breadth, and timing have led many observers to link it to the largest and most widespread technical change of the current era, information technology (see, e.g., Autor, Katz, and Krueger, 1997 and references therein).In this paper, we examine the firm-level evidence for a specific theory of how information technology (IT) could cause skill-biased technical change. In particular, we argue that the effects of IT on labor demand involve far more than simple automation and substitution. Instead, we highlight the central role of IT-enabled organizational change in

The "productivity paradox" of information systems (IS) is that, despite enormous improvements in the underlying technology, the benefits of IS spending have not been found in aggregate output statistics. One explanation is that IS spending may lead to increases in product quality or variety which tend to be overlooked in the aggregate statistics, even if they increase output at the firm-level. Furthermore, the restructuring and cost-cutting that are often necessary to realize the potential benefits of IS have only recently been undertaken in many firms.Our study uses new firm-level data on several components of IS spending for 1987-1991. The dataset includes 367 large firms which generated approximately 1.8 trillion dollars in output in 1991. We supplemented the IS data with data on other inputs, output, and price deflators from other sources. As a result, we could assess several econometric models of the contribution of IS to firm-level productivity.Our results indicate that IS spending has made a substantial and statistically significant contribution to firm output. We find that the gross marginal product (MP) for computer capital averaged 81% for the firms in our sample. We find that the MP for computer capital is at least as large as the marginal product of other types of capital investment and that, dollar for dollar, IS labor spending generates at least as much output as spending on non-IS labor and expenses. Because the models we applied were similar to those that have been previously used to assess the contribution of IS and other factors of production, we attribute the different results to the fact that our data set is more current and larger than others explored. We conclude that the productivity paradox disappeared by 1991, at least in our sample of firms.

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