Labor productivity impact of Internet infrastructure: evidence from a panel data

Abstract: The study aims to shed more light on the relationship between Internet penetration and labor productivity by analyzing the aggregate cross-country panel data available for a wide range of countries in the period of 2001-2015. An overview of hypothetical mechanisms behind the communication technologies’ impact on productivity is provided, while the Augmented Solow model is used as a theoretic framework which motivates the choice of variables for empirical analysis. The estimates are obtained by using a selection of econometric estimators: fixed-effects OLS, mean-group common correlated effects and "Difference GMM" for additional robustness. Extensive empirical analysis is performed in order to account for certain well-known factors which can cause a bias in the estimates. When using a "penetration index" comprising a few dimensions of a country’s Internet development as a main variable of interest, the paper finds significant positive effect only in developed countries’ sample. Difference GMM estimates, however, are not significant. Additional analysis suggests that there may be a more pronounced connection between mobile subscriptions and labor productivity (and more than just in the developed countries). The independent variables’ estimates all have a theoretically expected signs. The results are fairly robust and allow a cautiously optimistic view on the relationship between Internet development and labor productivity growth. Nevertheless the extent of effect may sensitive to some unobserved country characteristic or industry.