technological progress, wages, and unemployment

Chapter 13: Technological Progress, Wages, and Unemployment Slide #1Blanchard: Macroeconomics

Technological progress allows more output from the same number of workers

Technological progress leads to the creation of new goods and the disappearance of old goods

Observations:Observations:

Technological Progress, Wages, and Technological Progress, Wages, and UnemploymentUnemployment

Two Interpretations of the Observations:Two Interpretations of the Observations:

1. Optimistic: More output with the same workers

2. Pessimistic: Same output with fewer workers

1. Optimistic: More output with the same workers

2. Pessimistic: Same output with fewer workers


Output is produced using only labor (N)

Increases in A represent technological progress

Y/N = A

So N=Y/A

When productivity increases, does output increase enough to avoid a decrease in employment?

Recall:Recall:

Productivity, Output, and UnemploymentProductivity, Output, and Unemploymentin the Short Runin the Short Run

Y = F(K,AN) A= the state of technologyAssume K does not influence output

Then:Then:

Y=AN and



Technological Progress, Aggregate Supply, & Aggregate Demand -- A ReviewTechnological Progress, Aggregate Supply, & Aggregate Demand -- A Review

AS (A)

Output, Y

Pri

ce L

evel

, P

AD (A)

Y

P

• Equilibrium Y, P, equilibrium in labor, goods, & financial markets

• N = Y/A

• AD: P => (M/P) => i => Y

• AS: Given Pe, Y => u => W => P


AS (A)

Output, Y

Price Level, P

AD (A)

Y

P

AD´ (A´)

Productivity, Output, and Unemployment:Productivity, Output, and Unemployment:The Short RunThe Short Run

Technological Progress, Aggregate Supply, & Aggregate Demand -- A ReviewTechnological Progress, Aggregate Supply, & Aggregate Demand -- A Review

AS´ (A´)

• Equilibrium Y increases to Y1

• Productivity increases A to A´

• The impact A´ on AD is uncertain: assume AD´ (A´)

• At A´ production cost & AS shifts to AS´ (A´)

Y1


Productivity, Output, and Unemployment:Productivity, Output, and Unemployment:The Short RunThe Short Run

Did the increase in productivity increase employment? The Empirical EvidenceDid the increase in productivity increase employment? The Empirical Evidence



The Empirical EvidenceThe Empirical Evidence

Observation:Observation: Strong positive relation between outputgrowth and productivity growth

Question:Question: But what is the causation?

When an exogenous change in productivity(technology) occurs--sometimes unemploymentrises and sometimes falls in the short-run.

When an exogenous change in productivity(technology) occurs--sometimes unemploymentrises and sometimes falls in the short-run.

Conclusion:Conclusion:

Hint:Hint: Okun’s Law & labor hoarding during recessions


Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run

Price Setting & Wage Setting RevisitedPrice Setting & Wage Setting Revisited

Price Setting:Price Setting:A

WiP )(

A

WIf A increases, falls, which lowers P given W

Wage Setting:

the expected level of productivity is incorporated

into wages set in bargaining.

Wage Setting:

the expected level of productivity is incorporated

into wages set in bargaining.

),( zuFPAW ee



The Natural Rate of UnemploymentThe Natural Rate of Unemployment

Price Setting:Price Setting:A

WiP )(

Assuming expectations of prices and productivityare correct:

Wage Setting:Wage Setting: ),( zuFPAW ee

Pe=P & Ae=A

Real Wages: depends on A,u, & zP

WzuAF

P

W:),(

Real Wages: depends on A&uP

WA

P

W:

1


• A´F(u,z) increased 5%

A´F(u,z)

Wage setting

AF(u,z)


The Natural Rate of UnemploymentThe Natural Rate of Unemployment

´1 A

Pricesetting

Rea

l W

age,

W/P

Unemployment Rate, u

un

B1´A

• A increases 5%

• A´ = 1.05A • increased 5%1

´A

• un unchangedB´




• An observation from the model:

The natural rate of unemployment should not depend on the level of productivity or the rate of productivity growth.

• Does this fit the facts?




• Observations from the data (omitting the depression):

Periods of high productivity growth, 1940s &1960s, associated with lower unemployment

Periods of low productivity growth, 1970s &1980s, associated with higher unemployment



Explaining the Empirical FindingsExplaining the Empirical Findings

A ScenarioA Scenario

Assume: Price expectations are correct (Pe=P)Productivity expectations (Ae) areincorrect

Then: Price setting

1

A

P

W

),( zuFPAP

W eeWage setting

And: Ae>A when productivity slows down

Question: What will happen to unemployment?Question: What will happen to unemployment?



• If Ae increases more than A, the change in wage setting is greater than price setting

• Equilibrium B to B´

• The natural rate increases from un to u´nB´

u´n

Rea

l W

age,

W/P

Unemployment Rate, u

Wage setting

Pricesetting

un

B



Does technological progress cause anincrease in the unemployment rate in theshort-run or medium run?

Does technological progress cause anincrease in the unemployment rate in theshort-run or medium run?

What do you think...What do you think...


Technological Progress & Distribution Technological Progress & Distribution EffectsEffects

The Churn:The Churn: The process of new products replacingold ones and new skills making oldones less valuable

20th CenturyChurn:20th CenturyChurn:

•The number of farmers fell from 11

million to less than 1 million•3 million buss, truck, and taxidrivers today--zero in 1900•Today, more than 1 million computer programmers--nearlyzero in 1960



The Churn Continues: Fastest Growing OccupationsThe Churn Continues: Fastest Growing Occupations

1990 2005 Change(thousands) (thousands) (%)

Home health aides 287 550 +92%Systems analysts and computer scientists 463 829 +79%Medical assistants 165 287 +74%Human service workers 145 249 +71%Radiologic technologists & technicians 149 252 +70%Medical secretaries 232 390 +68%Psychologists 125 204 +64%Travel agents 132 214 +62%Correction officers 230 342 +61%

Source: Statistical Abstract of the United States, 1993, table 645



The Churn Continues: Fastest Declining OccupationsThe Churn Continues: Fastest Declining Occupations1990 2005 Change

(thousands) (thousands) (%)

Electrical/electronic precision assemblers 171 90 -48%Electrical/electronic assemblers 232 128 -45%Child-care workers, private household 314 190 -40%Textile draw-out and winding machine operators 199 138 -31%Telephone/cable/TV line installers and repairers 133 92 -30%Machine tool cutting operators and tenders 145 104 -29%Cleaners and servants, private households 411 310 -25%Switchboard operators 246 189 -25%Farmers 1074 822 -21%Sewing machine operators, garment 585 368 -20%

Source: Statistical Abstract of the United States, 1993, table 645



The Increase in Wage InequalityThe Increase in Wage Inequality

1963-1979 1979-1995

All Workers 17.7 -11.2

By education (years of schooling) 0-11 (less than high school) 17.2 -20.2 12 (high school) 18.8 -13.4 13-15 (less than 4 years of college) 17.7 -12.4 16+ (4 years of college or more) 18.9 3.5 18+ (graduate school) 25.8 14.0

By sex Men 18.3 -17.4 Women 16.8 -1.5

Source: Lawrence Katz and David Autor, “Changes in the Wages Structure and Earnings Inequality”

Real Wage Changes for Full-Time Workers 1963 -1995 (%)



The Increase in Wage InequalityThe Increase in Wage Inequality

Observations:Observations:

Explanations:Explanations:

Real wages for all workers have declined since 1979 whilelabor productivity has grown 1% per year since 1979.

Wage data does not reflect fringe benefits such as health careand pensions.

The CPI has risen more rapidly than the GDP deflator (0.6%/yr)and, therefore, the real wage in terms of consumption has notgrown as rapidly as the real wage in terms of output



The Causes of Wage InequalityThe Causes of Wage Inequality

The demand for skilled workers has risen relative to thedemand for unskilled workers.

Explaining the relative shift in demand:

• International trade

• Skill-based technological progress

technological progress, wages, and unemployment

Documents