Technological Progress, Wages, and Unemployment

1. Technological Progress, Wages, and Unemployment Observations: • 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 Two Interpretations of the Observations: 1. Optimistic: More output with the same workers 2. Pessimistic: Same output with fewer workers

2. Productivity, Output, and Unemploymentin the Short Run Recall: • 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? Y = F(K,AN)A= the state of technology Assume K does not influence output Then: Y=AN and

3. AS (A) • AD: P => (M/P) => i => Y Price Level, P • AS: Given Pe, • Y => u => W => P P AD (A) Y Output, Y Productivity, Output, and Unemploymentin the Short Run Technological Progress, Aggregate Supply, & Aggregate Demand -- A Review • Equilibrium Y, P, equilibrium • in labor, goods, & • financial markets • N = Y/A

4. AS (A) Price Level, P AS´ (A´) • At A´ production • cost & AS shifts to • AS´ (A´) P AD´ (A´) AD (A) Y1 Y Output, Y Productivity, Output, and Unemployment:The Short Run Technological Progress, Aggregate Supply, & Aggregate Demand -- A Review • Productivity increases • A to A´ • The impact A´ on AD • is uncertain: assume • AD´ (A´) • Equilibrium Y • increases to Y1

5. Productivity, Output, and Unemployment:The Short Run Did the increase in productivity increase employment?The Empirical Evidence

6. Strong positive relation between outputgrowth and productivity growth Observation: Question: But what is the causation? Hint: Okun’s Law & labor hoarding during recessions Conclusion: When an exogenous change in productivity(technology) occurs--sometimes unemploymentrises and sometimes falls in the short-run. Productivity, Output, and Unemploymentin the Short Run The Empirical Evidence

7. Price Setting: Wage Setting: the expected level of productivity is incorporated into wages set in bargaining. If A increases, falls, which lowers P given W Productivity and the Natural Rate of Unemployment -- the Medium Run Price Setting & Wage Setting Revisited

8. Price Setting: Wage Setting: Real Wages: depends on A&u Real Wages: depends on A,u, & z Productivity and the Natural Rate of Unemployment -- the Medium Run The Natural Rate of Unemployment Assuming expectations of prices and productivityare correct: Pe=P & Ae=A

9. A´F(u,z) • A increases 5% • increased 5% AF(u,z) • A´ = 1.05A • A´F(u,z) increased 5% B´ • ununchanged B Price setting Real Wage, W/P Wage setting un Unemployment Rate, u Productivity and the Natural Rate of Unemployment -- the Medium Run The Natural Rate of Unemployment

10. Productivity and the Natural Rate of Unemployment -- the Medium Run The Empirical Evidence • 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?

11. Productivity and the Natural Rate of Unemployment -- the Medium Run The Empirical Evidence

12. Productivity and the Natural Rate of Unemployment -- the Medium Run The Empirical Evidence • 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

13. Assume: Price expectations are correct (Pe=P) Productivity expectations (Ae) are incorrect Then: Price setting Wage setting And: Ae>A when productivity slows down Productivity and the Natural Rate of Unemployment -- the Medium Run Explaining the Empirical Findings A Scenario Question: What will happen to unemployment?

14. 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 unto u´n B´ Price setting Real Wage, W/P B Wage setting un u´n Unemployment Rate, u Productivity and the Natural Rate of Unemployment -- the Medium Run

15. What do you think... Productivity and the Natural Rate of Unemployment -- the Medium Run Does technological progress cause anincrease in the unemployment rate in theshort-run or medium run?

16. The Churn: The process of new products replacingold ones and new skills making oldones less valuable 20th CenturyChurn: • The number of farmers fell from 11 million to less than 1 million • 3 million buss, truck, and taxi drivers today--zero in 1900 • Today, more than 1 million computer programmers--nearly zero in 1960 Technological Progress & Distribution Effects

17. 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 Technological Progress & Distribution Effects The Churn Continues: Fastest Growing Occupations

18. 1990 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 Technological Progress & Distribution Effects The Churn Continues: Fastest Declining Occupations

19. Real Wage Changes for Full-Time Workers 1963 -1995 (%) 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” Technological Progress & Distribution Effects The Increase in Wage Inequality

20. Technological Progress & Distribution Effects The Increase in Wage Inequality Observations: Real wages for all workers have declined since 1979 whilelabor productivity has grown 1% per year since 1979. Explanations: 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

21. Technological Progress & Distribution Effects The 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