In this paper we propose an aggregate measure of this demand-pull channel for innovation. We
use BEA NIPA data that break down public investment between Equipment and Software (E&S
henceforth) and Structures. E&S includes a group of investment goods that are considered more
innovative than those included in structures, so we choose E&S as our high-tech aggregate.7 The focus
on investment is due to the fact that there is no aggregate data keeping track of the technological
composition of public consumption expenditures.
In figure 1 we report the evolution of the skill premium and of the composition of government
investment spending, expressed as the ratio of government investment in E&S over total government
investment. We can see that the share of public investment devoted to the high-tech aggregate, E&S,
is fairly constant from the early 1960s to the late 1970s, fluctuating between 16 and 20 percent. It
then increases steadily in the 1980s, reaching 41 in 1991, and it keeps growing, but to a slower pace,
in the 1990s till reaching 48 percent in 1999. In the figure we also see the well known dynamics of
the skill premium that after declining for most of the 1970s experiences a strong acceleration in the
late 1970s.8 The relevant fact here is that both series jump from a fairly steady course to a rapidly
increasing one during the late 1970s, early 1980s. This common and contemporaneous change trends
suggests that the shift towards high-tech public spending, which began around 1974 and radically
accelerated around 1978, might have had an influence on rising inequality in the 1980s.9
[FIGURE 1 ABOUT HERE]
Using the same data we find that also the composition of private investment progressively shifted
towards E&S since the late 1970s. However, the technological composition of public investment accel-
erated in the 1980s -the period when wage inequality increased more rapidly- while the rise of private
investment in E&S was concentrated in the 1990s. More precisely, the yearly average growth rate of
private investment was 9 percent while the growth rate of public investment was 16 percent in the
period 1970-90; while private spending jumped on those high growth rates only in the 1990s.10
As R&D represents an important part of innovation activity, figure 2 shows that, as was the case
for the composition of public spending, the trend of private R&D/GDP also increases substantially
in the late 1970s, along with that of the skill premium. The technological composition of government
7 The recent empirical literature on sector-specific technical change confirms the idea that high-tech sectors have been
the major engine of innovation in the last decades (See Hornstein et al., 2005)). Cummins and Violante (2002) find the
average technical change in E&S over the last 30 years in the U.S. to be between 5 and 6 percent. In this literature, the
change in E&S is proxied by the difference in growth rates between constant-quality consumption prices and quality-
adjusted prices of investment in E&S. The substantial decline of the quality-adjusted price of capital equipment since
the early 1970s provides evidence of E&S-specific technical change. Recently some empirical works have shown that,
although technical change in structures is less relevant than in equipment goods, it has been positive and significative
in the last decades. Gort, Greenwood and Rupert (1999) find a 1 percent yearly average structures-specific technical
change during the last three decades.
8The skill premium series has been obtained merging Krusell, Ohanian, Rios-Rull and Violante (2000) data and
Current Population Survey (1999) data, considering 1963 as the base year.
9 We are not interested in explaining the decline in the skill premium observed in the 1970s. For this reason the weaker
correlation between the two series in the 1970s does not affect our argument. In the literature, the decline of the skill
premium in the 1970s has been mainly attributed to an exogenous increase in the relative supply of college graduates in
those years, produced by the arrival on the job market of the Baby Boomers generation, and to the increase in college
enrollment produced by the Vietnam War draft. See Acemoglu (2002a) for a discussion.
10 We also find that the ratio of public to private investment in the innovative aggregate has been betwen 13 and 26
percent in the period 1970-90. This indicates that the scale of public E&S is not negligible in the period of interest.