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

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Dimensions of Technological Progress  There are optimistic and pessimistic views of technological progress.  Technological unemployment—a concept associated with the technocracy movement during the Great Depression—is the argument that unemployment comes from the introduction of machinery.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Dimensions of Technological Progress  Technological progress leads to the production of new goods and the disappearance of old ones.  The process of growth is fundamentally a process of creative destruction. With technological progress comes a process of job creation and job destruction.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Productivity, Output, and Unemployment in the Short Run  A production function with technological progress can be written as: 13-1  Leaving aside matters concerning capital, then:  Output is produced using only labor, N, and each worker produces A units of output. Increases in A represent technological progress.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Productivity, Output, and Unemployment in the Short Run  Then, employment is equal to output divided by productivity.  The concern is that, given output, an increase in productivity decreases the level of employment. This chapter explores this issue, in particular, the short- and medium-run responses of output, employment, and unemployment.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Technological Progress, Aggregate Supply, and Aggregate Demand 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 demand curve is downward sloping. An increase in the price level leads to a decrease in output.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Technological Progress, Aggregate Supply, and Aggregate Demand  The impact of an increase in productivity on output and employment in the short run depends on how it affects the aggregate supply and aggregate demand curves.  Higher productivity decreases the amount of labor needed to produce a unit of output, resulting in lower cost and a lower price for a given output level. The aggregate supply curve shifts down.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Technological Progress, Aggregate Supply, and Aggregate Demand  The effects of higher productivity on aggregate demand depend on the source of the productivity increase:  Technological breakthroughs will bring prospects of higher profits and a boom in investment. The demand for goods rises—aggregate demand shifts to the right.  The more efficient use of existing technologies may require little or no new investment. Worries about job security will trigger more saving—the aggregate demand curve shifts to the left.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Technological Progress, Aggregate Supply, and Aggregate Demand The Effects of an Increase in Productivity on Output in the Short Run 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.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The Empirical Evidence  Research on the effects of exogenous movements in productivity growth on output shows that:  Sometimes increases in productivity lead to increases in output sufficient to maintain or even increase employment in the short run.  Sometimes they do not, and unemployment increases in the short run.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The Empirical Evidence U.S. Labor Productivity and Output Growth, 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.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Productivity and the Natural Rate of Unemployment  If firms set their price equal to 1+  times cost, the price level is given by: 13-2  An extension of our earlier wage-setting equation that accounts for increases in productivity equals:  Wages now depend on the expected level of productivity.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard  The real wage paid by firms, W/P, increases one for one with productivity, A. Higher productivity leads to a lower price set by firms given the nominal wage; therefore, the real wage rate rises. The Natural Rate of Unemployment

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard  Under the condition that expectations are correct, then P e =P and A e =A, the wage-setting equation becomes:  The real wage rate depends on both the level of productivity and the unemployment rate. The Natural Rate of Unemployment

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The Natural Rate of Unemployment The Effects of an Increase in Productivity on the Natural Rate of Unemployment 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.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The Empirical Evidence Productivity Growth and Unemployment— Averages by Decade, 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.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Technological Progress, Unemployment, and the U.S. Expansion in the 1990s Table 13-1 Selected U.S. Macroeconomic Variables, GDP growth (%) Unemployment rate (%) Inflation rate (%) Labor productivity (%)

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The Empirical Evidence The Effects of a Decrease in Productivity Growth on the Unemployment Rate When Expectations of Productivity Growth Adjust Slowly 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.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Technological Progress and Distribution Effects  Technological progress is a process of structural change—the change in the structure of the economy induced by technological progress  Churning is the term used to describe how new techniques of production require new skills and make old skills less useful.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The Increase in Wage Inequality  Technological change is the reason for the large increase in wage inequality in the United States during the last 20 years.  At the low end of the education ladder, both the relative and the absolute wage of workers has declined.  At the high end, the relative wage of those with an advanced degree has increased by 20% since the early 1980s.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The Increase in Wage Inequality Evolution of Relative Wages, by Education Level, 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.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The Causes of Increased Wage Inequality  Among the arguments for the steady increase in the relative wage rate of skilled workers are:  International trade: Firms that hire low-skilled workers usually go abroad to find this source of labor.  Skill-biased technological progress: New machines and productive methods require high-skill workers with better education.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Occupations with the Largest Job Growth, Table 13-2 Occupations with the Largest Job Growth 1998 (thousands) 2008 (thousands) change (thousands)(%) change Systems analysts % Retail salespersons % Cashiers % General managers % Truck drivers % Office clerks % Registered nurses % Computer support specialists % Home health aides % Teacher assistants %

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Occupations with the Largest Job Decline, Table 13-3 Occupations with the Largest Job Decline 1998 (thousands) 2008 (thousands) Change (thousands)(%) change Farmers  173  13 Sewing machine operators  112  30 Child care workers, private household  97  40 Word processors, typists  93  20 Bookkeeping clerks  81 4444 Cleaners and servants  71  12 Farm workers  57 7777 Computer operators, mainframes  54  24 Textile machine operators  50  26 Switchboard operators  30  14

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard European Unemployment, Productivity Growth, and Technological Change EU Unemployment and Inflation, Today, inflation is roughly stable in Europe. This suggests that the high rate of unemployment reflects a high natural rate of unemployment.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard European Unemployment, Productivity Growth, and Technological Change  Two lines of arguments try to explain the high natural rate of unemployment in Europe today:  Hysteresis: The natural rate of unemployment depends on the history of actual unemployment. High unemployment has led to an increase in the natural rate.  Eurosclerosis: The high natural rate reflects a structural problem, mainly, European labor market institutions. Labor markets are not well adapted to the technological change of modern economies, causing a hardening of the economic structure.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Key Terms  technological unemployment, technological unemployment, technological unemployment,  structural change, structural change, structural change,  creative destruction, creative destruction, creative destruction,  churning, churning,  skill-biased technological progress, skill-biased technological progress, skill-biased technological progress,  hysteresis, hysteresis,  eurosclerosis, eurosclerosis,