Rapid innovation in semiconductors provides hope for better economic times

The Producer Price Index (PPI) of the United States suggests that the prices of semiconductors -- the sector responsible for producing the "brains" that power computers, smartphones, and tablets -- have barely fallen in recent years. The slow decline in semiconductor prices stands in sharp contrast to the rapidly falling prices reported from the mid-1980s to the early 2000s, and has been interpreted as a signal of sluggish innovation in this key sector.

The apparent slowdown puzzled Sichel and his coauthors, David M. Byrne of the Federal Reserve Board, and Stephen D. Oliner, of the American Enterprise Institute and UCLA -- particularly in light of evidence that the performance of microprocessor units (MPUs), which account for about half of U.S. semiconductor shipments, has continued to improve at rapid pace. After closely examining historical pricing data, the economists found that Intel, the leading producer of MPUs, dramatically changed the way it priced these chips in the mid-2000s -- roughly the same time when the slowdown reported by government data occurs. Prior to this period, Intel typically lowered the list prices of older chips to remain competitive with newly introduced chips. However, after 2006, Intel began to keep chip prices relatively unchanged over their life cycle, which affected official statistics.

To obtain a more accurate assessment of the pace of innovation in this important sector, Sichel, Byrne, and Oliner developed an alternative method of measurement that evaluates changes in actual MPU performance to gauge the rate of improvement in price-performance ratios. The economists' preferred index shows that quality-adjusted MPU prices continued to fall rapidly after the mid-2000s, contrary to what the PPI indicates -- meaning that worries about a slowdown in this sector are likely unwarranted.

According to Sichel, these results have important implications, not only for understanding the rate of technological progress in the semiconductor industry but also for the broader debate about the pace of innovation in the U.S. economy. "These findings give us reason to be optimistic," said Sichel. "If technical change in this part of the economy is still rapid, it provides hope for better times ahead."

Sichel and his coauthors also acknowledge that their results raise a new puzzle. "In recent years," they write, "the price index for computing equipment has fallen quite slowly by historical standards. If MPU prices have, in fact, continued to decline rapidly, why have prices for computers -- which rely on MPUs for their performance -- not followed suit?" The researchers believe it is possible that the official price indexes for computers may also suffer from measurement issues, and they are investigating this possibility in further work.