Disentangling neutral, directional, and complementarity effects of technological change: evidence from 32 OECD countries, 1994–2019

This paper develops and applies a novel growth-accounting methodology based on a Constant Elasticity of Substitution (CES) production function to disentangle the total effect of technological change on GDP into three components: neutral (level), directional (bias), and complementarity (substitution). While the neutral effect corresponds to Solow’s Total Factor Productivity (TFP), the directional effect captures changes in output elasticity, and the complementarity effect reflects variations in the elasticity of substitution between capital and labor. Applying the framework to a balanced panel of 32 OECD countries over 1994–2019 reveals that neutral technological change alone contributed little, and in many cases negatively, to GDP growth, in line with the ‘productivity paradox’. By contrast, the directional effect emerges as the dominant positive channel in nearly all countries, while the complementarity effect, though typically smaller, plays a substantial role in Canada, South Korea, and the UK; has been historically important in France, Italy, and Spain; and is increasingly salient in Australia, Japan, and the US. These results highlight the need to go beyond standard TFP measures to fully capture the economic impact of innovation, as well as the policy relevance of influencing both the direction and the complementarity of technological change.