Substitution of information technology with capital and labor in the United States industries, 1954--1989

In a firm, labor is thought to be the most important factor, and often possesses most of information. However, the exponential growth of investment in information technology since the late 1960s indicates the increasing role of the information factor in working processes. In the U.S., information technology has apparently changed the production processes in every industry. However, details on its effects are still being studied and generally unknown.;In the process of integrating technology into the cost function, the activities around both production and the information system are analyzed. We cover these two sides by adding a technology variable to represent information systems in our cost function. As a result, the inputs can be expressed in the following form of partitioned factors: nonproduction workers, production workers, capital and information technology.;By the duality theorem, cost and production functions have been proved to be reflecting the same technology at an efficient level of production. However, technologies used in information system management have to be appropriate with the production system and organization of the firm. In order to gain benefits from the use of information technology, the way firms separate and use factors of production have to simultaneously support appropriate information and production systems.;Our results from estimated cost functions and elasticities of substitution of the U.S. industries during 1954-1989 indicate in general, although with only very weak support: (1) the complementarity of information technology and production workers; (2) the substitutability of information technology and capital; (3) the substitutability between capital and both production workers and nonproduction workers in service-producing industries. Recent evidence on the emerging unemployment problem of skilled labor might partially be a result of the technologies implied by our empirical results.;This paper treats information technology as an important factor in the production function of a firm because of the unique characteristics of information and information technology factors and its related activities. The cost function is selected to be the main method used in this study because it is capable of capturing technologies in production and information processes, and also provides a simple framework for our empirical work.