© 2003 Prentice Hall Business PublishingMacroeconomics, 3/eOlivier Blanchard Prepared by: Fernando Quijano and Yvonn Quijano 13 C H A P T E R Technological

© 2003 Prentice Hall Business Publishing© 2003 Prentice Hall Business Publishing Macroeconomics, 3/eMacroeconomics, 3/e Olivier BlanchardOlivier Blanchard

Prepared by:Prepared by:

Fernando Quijano and Yvonn Fernando Quijano and Yvonn QuijanoQuijano

1313C H A P T E RC H A P T E R

TechnologicalTechnologicalProgress, Wages,Progress, Wages,and Unemploymentand Unemployment

© 2003 Prentice Hall Business Publishing© 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Macroeconomics, 3/e Olivier BlanchardOlivier Blanchard

Dimensions of Technological ProgressDimensions of Technological Progress

There are optimistic and pessimistic views of There are optimistic and pessimistic views of technological progress.technological progress.

Technological unemploymentTechnological unemployment—a concept —a concept associated with the associated with the technocracy movementtechnocracy movement during the Great Depression—is the argument during the Great Depression—is the argument that unemployment comes from the that unemployment comes from the introduction of machinery.introduction of machinery.


Dimensions of Technological ProgressDimensions of Technological Progress

Technological progress leads to the Technological progress leads to the production of new goods and the production of new goods and the disappearance of old ones.disappearance of old ones.

The process of growth is fundamentally a The process of growth is fundamentally a process of process of creative destructioncreative destruction. With . With technological progress comes a process of job technological progress comes a process of job creation and job destruction.creation and job destruction.


Productivity, Output, andProductivity, Output, andUnemployment in the Short RunUnemployment in the Short Run

A production function with technological A production function with technological progress can be written as:progress can be written as:

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Y F K A N ( , )

Leaving aside matters concerning capital, then:Leaving aside matters concerning capital, then:Y A N

Output is produced using only labor, Output is produced using only labor, NN, and , and each worker produces each worker produces AA units of output. units of output. Increases in Increases in AA represent technological progress. represent technological progress.


Productivity, Output, andProductivity, Output, andUnemployment in the Short RunUnemployment in the Short Run

Then, employment is equal to output divided by Then, employment is equal to output divided by productivity.productivity.

NY

A

The concern is that, given output, an increase in The concern is that, given output, an increase in productivity decreases the level of employment. productivity decreases the level of employment. This chapter explores this issue, in particular, This chapter explores this issue, in particular, the short- and medium-run responses of output, the short- and medium-run responses of output, employment, and unemployment.employment, and unemployment.

Y F K A N ( , )


Technological Progress, Aggregate Technological Progress, Aggregate Supply, and Aggregate DemandSupply, and Aggregate Demand

Aggregate Supply and Aggregate Supply and Aggregate Demand for a Aggregate Demand for a Given Level of Given Level of ProductivityProductivity

The aggregate supply curve is upward sloping. An increase in output leads to an increase in the price level. The aggregate demand curve is downward sloping. An increase in the price level leads to a decrease in output.



The impact of an increase in productivity on The impact of an increase in productivity on output and employment in the short run output and employment in the short run depends on how it affects the aggregate depends on how it affects the aggregate supply and aggregate demand curves.supply and aggregate demand curves. Higher productivity decreases the amount of labor Higher productivity decreases the amount of labor

needed to produce a unit of output, resulting in needed to produce a unit of output, resulting in lower cost and a lower price for a given output lower cost and a lower price for a given output level. The aggregate supply curve shifts down.level. The aggregate supply curve shifts down.



The effects of higher productivity on aggregate The effects of higher productivity on aggregate demand depend on the source of the demand depend on the source of the productivity increase:productivity increase: Technological breakthroughs will bring prospects of Technological breakthroughs will bring prospects of

higher profits and a boom in investment. The higher profits and a boom in investment. The demand for goods rises—aggregate demand shifts demand for goods rises—aggregate demand shifts to the right.to the right.

The more efficient use of existing technologies may The more efficient use of existing technologies may require little or no new investment. Worries about require little or no new investment. Worries about job security will trigger more saving—the aggregate job security will trigger more saving—the aggregate demand curve shifts to the left.demand curve shifts to the left.



The Effects of an The Effects of an Increase in Productivity Increase in Productivity on Output in the Short on Output in the Short RunRun

An increase in productivity shifts the aggregate supply curve down. It has an ambiguous effect on the aggregate demand curve, which may shift to the left or to the right. In this figure, we assume a shift to the right.


The Empirical EvidenceThe Empirical Evidence

Research on the effects of exogenous Research on the effects of exogenous movements in productivity growth on output movements in productivity growth on output shows that:shows that: Sometimes increases in productivity lead to Sometimes increases in productivity lead to

increases in output sufficient to maintain or even increases in output sufficient to maintain or even increase employment in the short run.increase employment in the short run.

Sometimes they do not, and unemployment Sometimes they do not, and unemployment increases in the short run.increases in the short run.



U.S. Labor Productivity U.S. Labor Productivity and Output Growth, and Output Growth, 1960-20001960-2000

There is a strong positive relation between output growth and productivity growth. But the causality runs from output growth to productivity growth, not the other way around.


Productivity and theProductivity and theNatural Rate of UnemploymentNatural Rate of Unemployment

If firms set their price equal to 1+If firms set their price equal to 1+ times cost, times cost, the price level is given by:the price level is given by:

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P rice se tting P ( )1 W

A

An extension of our earlier wage-setting An extension of our earlier wage-setting equation that accounts for increases in equation that accounts for increases in productivity equals:productivity equals:

W age se tting W A P F u ze e ( , )

Wages now depend on the expected level of Wages now depend on the expected level of productivity.productivity.


The real wage paid by firms, W/P, increases The real wage paid by firms, W/P, increases one for one with productivity, A. Higher one for one with productivity, A. Higher productivity leads to a lower price set by firms productivity leads to a lower price set by firms given the nominal wage; therefore, the real given the nominal wage; therefore, the real wage rate rises.wage rate rises.

W

P

A

1

The Natural Rate of UnemploymentThe Natural Rate of Unemployment


Under the condition that expectations are Under the condition that expectations are correct, then correct, then PPee==PP and and AAee==AA, the wage-setting , the wage-setting equation becomes:equation becomes:

The real wage rate depends on both the level of The real wage rate depends on both the level of productivity and the unemployment rate.productivity and the unemployment rate.


W

PA F u z ( , )

( ) ,



The Effects of an The Effects of an Increase in Productivity Increase in Productivity on the Natural Rate of on the Natural Rate of UnemploymentUnemployment

An increase in productivity shifts both the wage and the price-setting curves in the same proportion and thus has no effect on the natural rate of unemployment.



Productivity Growth and Productivity Growth and Unemployment—Unemployment—Averages by Decade, Averages by Decade, 1890-20001890-2000

There is little relation between the 10-year averages of productivity growth and the 10-year averages of the unemployment rate. If anything, higher productivity growth is associated with lower unemployment.


Technological Progress, Unemployment, Technological Progress, Unemployment, and the U.S. Expansion in the 1990sand the U.S. Expansion in the 1990s

Table 13-1 Selected U.S. Macroeconomic Variables, 1995-2000

19951995 19961996 19971997 19981998 19991999 20002000

GDP growth (%) 2.7 3.6 4.4 4.4 4.2 5.0

Unemployment rate (%) 5.6 5.4 4.9 4.5 4.2 4.0

Inflation rate (%) 2.2 1.9 1.9 1.3 1.5 2.0

Labor productivity (%) 1.2 2.1 2.1 2.9 2.7 3.7



The Effects of a Decrease The Effects of a Decrease in Productivity Growth on in Productivity Growth on the Unemployment Rate the Unemployment Rate When Expectations of When Expectations of Productivity Growth Adjust Productivity Growth Adjust SlowlySlowly

If it takes time for workers to adjust their expectations of productivity growth, a slowdown in productivity growth will lead to an increase in the natural rate of unemployment for some time.


Technological ProgressTechnological Progressand Distribution Effectsand Distribution Effects

Technological progress is a process of Technological progress is a process of structural changestructural change—the change in the —the change in the structure of the economy induced by structure of the economy induced by technological progress.technological progress.

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ChurningChurning is the term used to describe how new is the term used to describe how new techniques of production require new skills and techniques of production require new skills and make old skills less useful.make old skills less useful.


The Increase in Wage InequalityThe Increase in Wage Inequality

Technological change is the reason for the Technological change is the reason for the large increase in wage inequality in the United large increase in wage inequality in the United States during the last 20 years.States during the last 20 years.

At the low end of the education ladder, both At the low end of the education ladder, both the relative and the absolute wage of workers the relative and the absolute wage of workers has declined.has declined.

At the high end, the relative wage of those At the high end, the relative wage of those with an advanced degree has increased by with an advanced degree has increased by 20% since the early 1980s.20% since the early 1980s.


The Increase in Wage InequalityThe Increase in Wage Inequality

Evolution of Relative Evolution of Relative Wages, by Education Wages, by Education Level, 1973-1999Level, 1973-1999

Since the early 1980s, the relative wage of workers with a low education level has decreased; the relative wage of workers with a high education level has increased.


The Causes of IncreasedThe Causes of IncreasedWage InequalityWage Inequality

Among the arguments for the steady increase Among the arguments for the steady increase in the relative wage rate of skilled workers are:in the relative wage rate of skilled workers are: International trade: Firms that hire low-skilled International trade: Firms that hire low-skilled

workers usually go abroad to find this source of workers usually go abroad to find this source of labor.labor.

Skill-biased technological progressSkill-biased technological progress: New : New machines and productive methods require high-skill machines and productive methods require high-skill workers with better education.workers with better education.


Occupations with theOccupations with theLargest Job Growth, 1998-2008Largest Job Growth, 1998-2008

Table 13-2 Occupations with the Largest Job Growth

1998(thousands)

2008(thousands)

change (thousands) (%) change

Systems analystsSystems analysts 617617 11941194 577577 + 94%+ 94%

Retail salespersonsRetail salespersons 40564056 46204620 563563 + 14%+ 14%

CashiersCashiers 31983198 37543754 556556 + 17%+ 17%

General managersGeneral managers 33623362 39133913 551551 + 16%+ 16%

Truck driversTruck drivers 29702970 34633463 493493 + 17%+ 17%

Office clerksOffice clerks 30213021 34843484 463463 + 15%+ 15%

Registered nursesRegistered nurses 20792079 25302530 451451 + 22%+ 22%

Computer support specialistsComputer support specialists 429429 869869 439439 + 102%+ 102%

Home health aidesHome health aides 746746 11791179 433433 + 58%+ 58%

Teacher assistantsTeacher assistants 11921192 15671567 375375 + 61%+ 61%


Occupations with theOccupations with theLargest Job Decline, 1998-2008Largest Job Decline, 1998-2008

Table 13-3 Occupations with the Largest Job Decline

1998(thousands)

2008(thousands)

Change (thousands) (%) change

FarmersFarmers 13061306 11351135 173173 1313

Sewing machine operatorsSewing machine operators 369369 257257 112112 3030

Child care workers, private householdChild care workers, private household 305305 209209 9797 4040

Word processors, typistsWord processors, typists 459459 365365 9393 2020

Bookkeeping clerksBookkeeping clerks 20782078 19971997 8181 44

Cleaners and servantsCleaners and servants 600600 530530 7171 1212

Farm workersFarm workers 851851 794794 5757 77

Computer operators, mainframesComputer operators, mainframes 224224 170170 5454 2424

Textile machine operatorsTextile machine operators 192192 141141 5050 2626

Switchboard operatorsSwitchboard operators 214214 185185 3030 1414


European Unemployment, Productivity European Unemployment, Productivity Growth, and Technological ChangeGrowth, and Technological Change

EU Unemployment EU Unemployment and Inflation, 1970-and Inflation, 1970-20012001

Today, inflation is roughly stable in Europe. This suggests that the high rate of unemployment reflects a high natural rate of unemployment.


European Unemployment, Productivity European Unemployment, Productivity Growth, and Technological ChangeGrowth, and Technological Change

Two lines of arguments try to explain the high Two lines of arguments try to explain the high natural rate of unemployment in Europe today:natural rate of unemployment in Europe today: HysteresisHysteresis: The natural rate of unemployment : The natural rate of unemployment

depends on the history of actual unemployment. depends on the history of actual unemployment. High unemployment has led to an increase in the High unemployment has led to an increase in the natural rate.natural rate.

EurosclerosisEurosclerosis: The high natural rate reflects a : The high natural rate reflects a structural problem, mainly, European labor market structural problem, mainly, European labor market institutions. Labor markets are not well adapted to institutions. Labor markets are not well adapted to the technological change of modern economies, the technological change of modern economies, causing a hardening of the economic structure.causing a hardening of the economic structure.


Key TermsKey Terms

technological unemployment,technological unemployment, structural change,structural change, creative destruction,creative destruction, churning,churning,

skill-biased technological progress,

hysteresis, eurosclerosis,

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© 2003 Prentice Hall Business PublishingMacroeconomics, 3/eOlivier Blanchard Prepared by: Fernando Quijano and Yvonn Quijano 13 C H A P T E R Technological