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CHAP

TER13

CHAP

TER1

3

2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier

echnological

Progress, Wages,

and

Unemployment

Prepared b!

"ernando #ui$ano and %vonn #ui$ano

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Chapter13

:Technolog

icalProgress,

Wages,andUnemployment

2006 Prentice Hall Business Publishin Macroeconomics, 4/e 2 of 2

Technological Progress, Wages,

and Unemployment

!here are o"timistic and "essimistic vie#s of

technological "rogress$

Technological unemployment%a conce"t

associated #ith the technocracy movement

during the &reat 'e"ression%is the argument

that unem"lo(ment comes from the introduction

of machiner($

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2006 Prentice Hall Business Publishin Macroeconomics, 4/e of 2

Productivity, Output, and

Unemployment in the Short Run

) "roduction function #ith technological "rogress

can be #ritten as*

Y F K A N = ( , )

+eaving aside matters concerning ca"ital, then*

Y A N=

Out"ut is "roduced using onl( labor, N, and each#orer "roducesAunits of out"ut$ -ncreases in

Are"resent technological "rogress$

131

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Productivity, Output, and

Unemployment in the Short Run

!hen, em"lo(ment is e.ual to out"ut divided b(

"roductivit($

N

Y

A=

!he concern is that, given out"ut, an increase in

"roductivit( decreases the level of em"lo(ment$

!his cha"ter e"lores this issue, in "articular, theshort and mediumrun res"onses of out"ut,

em"lo(ment, and unem"lo(ment$

Y F K A N = ( , )

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Technological Progress, !ggregate

Supply, and !ggregate "emand

ecall the basic structure of the aggregate

su""l( and aggregate demand model*

Out"ut is determined b( the intersection of

the aggregate su""l( curve and the

aggregate demand curve$

!he aggregate supplyrelation gives the "rice

level for a given level of out"ut$

!he aggregate demandrelation gives out"ut

for a given "rice level$

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Wages,andUnempl

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Aggregate Supply and

Aggregate Demand for

a Given Level of

Productivity

The aggregate supply

curve is upward sloping.

An increase in output

leads to an increase in

the price level. The

aggregate demandcurve is downward

sloping. An increase in

the price level leads to a

decrease in output.

#igure 13 1

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Chapter13

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Wages,andUnempl

oyment




!he im"act of an increase in "roductivit( on

out"ut and em"lo(ment in the short run de"ends

on ho# it affects the aggregate su""l( and

aggregate demand curves$

Higher "roductivit( decreases the amount of

labor needed to "roduce a unit of out"ut,

resulting in lo#er cost and a lo#er "rice for a

given out"ut level$ !he aggregate su""l( curve

shifts do#n$

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Wages,andUnempl

oyment

2006 Prentice Hall Business Publishin Macroeconomics, 4/e of 2



!he effects of higher "roductivit( on aggregatedemand de"end on the source of the "roductivit(increase*

!echnological breathroughs #ill bring

"ros"ects of higher "rofits and a boom ininvestment$ !he demand for goods rises%aggregate demand shifts to the right$

!he more efficient use of eistingtechnologies ma( re.uire little or no ne#investment$ 5orries about ob securit( #illtrigger more saving%the aggregate demandcurve shifts to the left$

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Wages,andUnempl

oyment




The Effects of an

Increase in

Productivity on Output

in the Short Run

An increase inproductivity shifts the

aggregate supply curve

down. It has an

ambiguous effect on the

aggregate demandcurve, which may shift

to the left or to the right.

In this figure, we

assume a shift to the

right.

#igure 13 $

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Chapter13

:Technolog

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Wages,andUnempl

oyment


The %mpirical %vidence

!S! La"or

Productivity and

Output Gro#th

since $%&'

There is a strongpositive relation

between output

growth and

productivity growth.

But the causalityruns from output

growth to

productivity growth,

not the other way

around.

#igure 13 3

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Wages,andUnempl

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esearch on the effects of eogenous

movements in "roductivit( gro#th on out"ut

sho#s that*

9ometimes increases in "roductivit( lead to

increases in out"ut sufficient to maintain or

even increase em"lo(ment in the short run$

9ometimes the( do not, and unem"lo(ment

increases in the short run$

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Wages,andUnempl

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Productivity and the

&atural Rate o' Unemployment

ecall from :ha"ter 6 that the natural rate of

unem"lo(ment is determined b( t#o relations,

the "ricesetting relation and the #agesetting

relation$

Our first ste" must be to thin about ho#

changes in "roductivit( affect each of these t#o

relations$

13$

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:onsider "rice setting first*

;rom , each #orer "roducesAunit

of out"ut$

-f the nominal #age is e.ual to W, thenominal cost of "roducing one unit of out"ut

is therefore e.ual to (1/A) W = W/A

-f firms set their "rice e.ual to 8

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)n etension of our earlier #agesetting e.uation

that accounts for increases in "roductivit( e.uals*

W a g e s e t t i n g W = A P F u ze e ( , )

5ages no# de"end on the e"ected level of

"roductivit($

5orers care about real #ages, not nominal

#ages, so #ages de"end on the =e"ected>"rice level, Pe$

5ages no# also de"end on the e"ectedlevel of "roductivit(,Ae$

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Wages,andUnempl

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!he real #age "aid b( firms, W/P, increases one

for one #ith "roductivit(,A$ Higher "roductivit(

leads to a lo#er "rice set b( firms given the

nominal #age? therefore, the real #age rate

rises$

W

P

A=

+1

The &atural Rate o' Unemployment

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@nder the condition that e"ectations are correct,

then PeAPandAeAA, the #agesetting e.uation

becomes*

!he real #age rate de"ends on both the level of

"roductivit( and the unem"lo(ment rate$


W

PA F u z= ( , )

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The Effects of an

Increase in

Productivity on the

(atural Rate of

nemployment

An increase in

productivity shifts both

the wage- and the price-

setting curves by the

same proportion, andthus has no effect on

the natural rate of

unemployment.

#igure 13 (

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;rom , #e see that the real #age

im"lied b( "rice setting is no# higher b( $

;rom , #e see that at a given

unem"lo(ment rate, the real #age im"lied b(

#age setting is also higher than $

Cote that at the initial unem"lo(ment rate un,

both curves shift u" b( the same amount,

namel(, of the initial real #age$

W

P

A=

+1

W

PA F u z= ( , )

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:Technolog

icalProgress,




Productivity Gro#th

and nemployment)

Averages "y Decade

since $*%'

There is little relationbetween the 10-year

averages of productivity

growth and the 10-year

averages of the

unemployment rate. Ifanything, higher

productivity growth is

associated with lower

unemployment.

#igure 13 )

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+etDs summariEe #hat #e have seen in this and the

"receding section* -n the short run, there is no reason to e"ect a

s(stematic relation bet#een movements in

"roductivit( gro#th and movements inunem"lo(ment$

-n the medium run, if there is a relation bet#een

"roductivit( gro#th and unem"lo(ment, it

a""ears to be an inverse relation$&iven this evidence, structural changeF the

change in the structure of the econom( induced

b( technological "rogress, ma( #here fears of

technological unem"lo(ment come from$

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B( the end of 2008, the recession in the @$9$ #as

over, and out"ut gro#th #as "ositive in 2002 and

200$ But unem"lo(ment continued to increase$

!he recover( #as dubbed thejobless recovery$

he &e+ %conomy, the US

%-pansion o' the 1../s, and the

0oless Recovery o' the %arly

$///s

Tale 1 Selected U.S. Macroeconomic Variables, United States, 1996!""#

1996 199$ 199% 1999 !""" !""1 !""! !""#

&'( gro)th *+ !.$ -.- -.! -.- #.$ ". !.! #.1

Unemployment rate *+ .- -.9 -. -.! -." -.% .% 6."

/n0lation rate *&'( de0lator, + 1.9 1.9 1.1 1.- !.! !.- 1. 1.$

abor productivity *+ 1.% !.! !.! !.- !.6 ".$ #.9 #.-

Technological Progress

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Technological Progress

and "istriution %''ects

Gose"h 9chum"eter, a Harvard economists,

em"hasiEed that the "rocess of gro#th #as

fundamentall( a "rocess of creative

destructionF ne# goods are develo"ed, maing

old ones obsolete, ne# techni.ues of "roductionare introduced$

2hurningis the term used to describe ho# ne#

techni.ues of "roduction re.uire ne# sills and

mae old sills less useful$

133

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The 2ncrease in Wage 2neuality

!echnological change is the reason for the large

increase in #age ine.ualit( in the @nited 9tates

during the last 21 (ears$

)t the lo# end of the education ladder, both the

relative and the absolute #age of #orers has

declined$

)t the high end, the relative #age of those #ith

an advanced degree has increased b( 21 since

the earl( 870s$

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The Causes o' 2ncreased

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Wage 2neuality

)mong the arguments for the stead( increase in

the relative #age rate of silled #orers are*

-nternational trade* ;irms that hire lo#silled

#orers usuall( go abroad to find this source

of labor$

S3illbiased technological progress* Ce#

machines and "roductive methods re.uire

highsill #orers #ith better education$


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Wage 2neuality

!here are at least three reasons to thin that the

future ma( be different from the recent "ast

#here #age ine.ualit( is concerned*

!he trend in relative demand ma( sim"l( slo#

do#n$

!echnological "rogress is not eogenous

!he relative su""l( of highsill versus lo#

sill #orers is also not eogenous$

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%uropean Unemployment,

Productivity 5ro+th, and

echnological Change

#igure 1

European

nemployment

and Inflation.

$%0'45''1

Today, inflationis roughly stable

in 'urope. This

suggests that

the high rate of

unemploymentreflects a high

natural rate of

unemployment.

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Wages,

andUnemployment




echnological Change

;igure 8 loos at the evolution of both

unem"lo(ment and inflation in the uro )rea

since 8730$ -t leads to three conclusions*

-nflation increased in the 8730s

-nflation then fell shar"l( in the earl( 870s$

9ince the last 870s, inflation has declined,

but slo#l($

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Wages,

andUnemployment




echnological Change

conomists "oint to t#o maor adverse shocs

that ma( have caused the natural rate of

unem"lo(ment to increase so much in the 8730s

and the 870s*

One is the threefold increase in the "rice of oil

in the 8730s

!he other is the decrease in the rate of

technological "rogress, starting in the mid

8730s$

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Wages,

andUnemployment




echnological Change

conomists have e"lored t#o main lines of

argument as to #hat accounts for the high

natural rate of unem"lo(ment in the four larges

@ countries*

8$ !he hysteresisline of argument holds that

the natural rate of unem"lo(ment is not

inde"endent of actual unem"lo(ment$

2$ !he eurosclerosisline of argument argues

that the high natural rate toda( reflects astructural "roblem$

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Chapter13:Technolog

icalProgre

ss,

Wages,

andUnemployment

6ey Terms

technological

unem"lo(ment

structural change

obless recover(

creative destruction

churning sillbiased technological "rogress

h(steresis

eurosclerosis

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