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 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?

3. 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

4. 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

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

6. 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:

7. 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.

8. 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

9. 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

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. 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?

14. 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

15. 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?

16. 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

17. Technological Progress & Distribution Effects
The Churn Continues: Fastest Growing Occupations
Change (thousands) (thousands) (%)
Home health aides % Systems analysts and computer scientists % Medical assistants % Human service workers % Radiologic technologists & technicians % Medical secretaries % Psychologists % Travel agents % Correction officers %
Source: Statistical Abstract of the United States, 1993, table 645

18. Technological Progress & Distribution Effects
The Churn Continues: Fastest Declining Occupations
Change (thousands) (thousands) (%)
Electrical/electronic precision assemblers % Electrical/electronic assemblers % Child-care workers, private household % Textile draw-out and winding machine operators % Telephone/cable/TV line installers and repairers % Machine tool cutting operators and tenders % Cleaners and servants, private households % Switchboard operators % Farmers % Sewing machine operators, garment %
Source: Statistical Abstract of the United States, 1993, table 645

19. Technological Progress & Distribution Effects
The Increase in Wage Inequality
All Workers
By education (years of schooling) (less than high school) (high school) (less than 4 years of college) (4 years of college or more) (graduate school)
By sex Men Women
Source: Lawrence Katz and David Autor, “Changes in the Wages Structure and Earnings Inequality”
Real Wage Changes for Full-Time Workers (%)

20. 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

21. 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