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

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

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

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

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

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

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

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

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

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?

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

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

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

Productivity and the Natural Rate of Unemployment -- the Medium Run If Ae increases more than A, the change in wage setting is greater than price setting Real Wage, W/P Unemployment Rate, u Wage setting Price setting Equilibrium B to B´ The natural rate increases from un to u´n B´ u´n un B

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

Technological Progress & Distribution Effects The Churn: The process of new products replacing old ones and new skills making old ones less valuable 20th Century Churn: 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 The 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

Technological Progress & Distribution Effects The Churn Continues: Fastest Declining Occupations 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 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 (%)

Technological Progress & Distribution Effects The Increase in Wage Inequality Observations: Real wages for all workers have declined since 1979 while labor productivity has grown 1% per year since 1979. Explanations: Wage data does not reflect fringe benefits such as health care and pensions. The CPI has risen more rapidly than the GDP deflator (0.6%/yr) and, therefore, the real wage in terms of consumption has not grown as rapidly as the real wage in terms of output

Technological Progress & Distribution Effects The Causes of Wage Inequality The demand for skilled workers has risen relative to the demand for unskilled workers. Explaining the relative shift in demand: International trade Skill-based technological progress