Chapter 13: Technological Progress, Wages, and Unemployment Slide #1Blanchard: Macroeconomics
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
Observations:Observations:
Technological Progress, Wages, and Technological Progress, Wages, and UnemploymentUnemployment
Two Interpretations of the Observations:Two Interpretations of the Observations:
1. Optimistic: More output with the same workers
2. Pessimistic: Same output with fewer workers
1. Optimistic: More output with the same workers
2. Pessimistic: Same output with fewer workers
Chapter 13: Technological Progress, Wages, and Unemployment Slide #2Blanchard: Macroeconomics
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?
Recall:Recall:
Productivity, Output, and UnemploymentProductivity, Output, and Unemploymentin the Short Runin the Short Run
Y = F(K,AN) A= the state of technologyAssume K does not influence output
Then:Then:
Y=AN and
Chapter 13: Technological Progress, Wages, and Unemployment Slide #3Blanchard: Macroeconomics
Productivity, Output, and UnemploymentProductivity, Output, and Unemploymentin the Short Runin the Short Run
Technological Progress, Aggregate Supply, & Aggregate Demand -- A ReviewTechnological Progress, Aggregate Supply, & Aggregate Demand -- A Review
AS (A)
Output, Y
Pri
ce L
evel
, P
AD (A)
Y
P
• Equilibrium Y, P, equilibrium in labor, goods, & financial markets
• N = Y/A
• AD: P => (M/P) => i => Y
• AS: Given Pe, Y => u => W => P
Chapter 13: Technological Progress, Wages, and Unemployment Slide #4Blanchard: Macroeconomics
AS (A)
Output, Y
Price Level, P
AD (A)
Y
P
AD´ (A´)
Productivity, Output, and Unemployment:Productivity, Output, and Unemployment:The Short RunThe Short Run
Technological Progress, Aggregate Supply, & Aggregate Demand -- A ReviewTechnological Progress, Aggregate Supply, & Aggregate Demand -- A Review
AS´ (A´)
• Equilibrium Y increases to Y1
• Productivity increases A to A´
• The impact A´ on AD is uncertain: assume AD´ (A´)
• At A´ production cost & AS shifts to AS´ (A´)
Y1
Chapter 13: Technological Progress, Wages, and Unemployment Slide #5Blanchard: Macroeconomics
Productivity, Output, and Unemployment:Productivity, Output, and Unemployment:The Short RunThe Short Run
Did the increase in productivity increase employment? The Empirical EvidenceDid the increase in productivity increase employment? The Empirical Evidence
Chapter 13: Technological Progress, Wages, and Unemployment Slide #6Blanchard: Macroeconomics
Productivity, Output, and UnemploymentProductivity, Output, and Unemploymentin the Short Runin the Short Run
The Empirical EvidenceThe Empirical Evidence
Observation:Observation: Strong positive relation between outputgrowth and productivity growth
Question:Question: But what is the causation?
When an exogenous change in productivity(technology) occurs--sometimes unemploymentrises and sometimes falls in the short-run.
When an exogenous change in productivity(technology) occurs--sometimes unemploymentrises and sometimes falls in the short-run.
Conclusion:Conclusion:
Hint:Hint: Okun’s Law & labor hoarding during recessions
Chapter 13: Technological Progress, Wages, and Unemployment Slide #7Blanchard: Macroeconomics
Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run
Price Setting & Wage Setting RevisitedPrice Setting & Wage Setting Revisited
Price Setting:Price Setting:A
WiP )(
A
WIf A increases, falls, which lowers P given W
Wage Setting:
the expected level of productivity is incorporated
into wages set in bargaining.
Wage Setting:
the expected level of productivity is incorporated
into wages set in bargaining.
),( zuFPAW ee
Chapter 13: Technological Progress, Wages, and Unemployment Slide #8Blanchard: Macroeconomics
Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run
The Natural Rate of UnemploymentThe Natural Rate of Unemployment
Price Setting:Price Setting:A
WiP )(
Assuming expectations of prices and productivityare correct:
Wage Setting:Wage Setting: ),( zuFPAW ee
Pe=P & Ae=A
Real Wages: depends on A,u, & zP
WzuAF
P
W:),(
Real Wages: depends on A&uP
WA
P
W:
1
Chapter 13: Technological Progress, Wages, and Unemployment Slide #9Blanchard: Macroeconomics
• A´F(u,z) increased 5%
A´F(u,z)
Wage setting
AF(u,z)
Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run
The Natural Rate of UnemploymentThe Natural Rate of Unemployment
´1 A
Pricesetting
Rea
l W
age,
W/P
Unemployment Rate, u
un
B1´A
• A increases 5%
• A´ = 1.05A • increased 5%1
´A
• un unchangedB´
Chapter 13: Technological Progress, Wages, and Unemployment Slide #10Blanchard: Macroeconomics
Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run
The Empirical EvidenceThe 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?
Chapter 13: Technological Progress, Wages, and Unemployment Slide #11Blanchard: Macroeconomics
Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run
The Empirical EvidenceThe Empirical Evidence
Chapter 13: Technological Progress, Wages, and Unemployment Slide #12Blanchard: Macroeconomics
Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run
The Empirical EvidenceThe 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
Chapter 13: Technological Progress, Wages, and Unemployment Slide #13Blanchard: Macroeconomics
Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run
Explaining the Empirical FindingsExplaining the Empirical Findings
A ScenarioA Scenario
Assume: Price expectations are correct (Pe=P)Productivity expectations (Ae) areincorrect
Then: Price setting
1
A
P
W
),( zuFPAP
W eeWage setting
And: Ae>A when productivity slows down
Question: What will happen to unemployment?Question: What will happen to unemployment?
Chapter 13: Technological Progress, Wages, and Unemployment Slide #14Blanchard: Macroeconomics
Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run
• 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 un to u´nB´
u´n
Rea
l W
age,
W/P
Unemployment Rate, u
Wage setting
Pricesetting
un
B
Chapter 13: Technological Progress, Wages, and Unemployment Slide #15Blanchard: Macroeconomics
Productivity and the Natural Rate of Productivity and the Natural Rate of Unemployment -- the Medium RunUnemployment -- the Medium Run
Does technological progress cause anincrease in the unemployment rate in theshort-run or medium run?
Does technological progress cause anincrease in the unemployment rate in theshort-run or medium run?
What do you think...What do you think...
Chapter 13: Technological Progress, Wages, and Unemployment Slide #16Blanchard: Macroeconomics
Technological Progress & Distribution Technological Progress & Distribution EffectsEffects
The Churn:The Churn: The process of new products replacingold ones and new skills making oldones less valuable
20th CenturyChurn:20th CenturyChurn:
•The number of farmers fell from 11
million to less than 1 million•3 million buss, truck, and taxidrivers today--zero in 1900•Today, more than 1 million computer programmers--nearlyzero in 1960
Chapter 13: Technological Progress, Wages, and Unemployment Slide #17Blanchard: Macroeconomics
Technological Progress & Distribution Technological Progress & Distribution EffectsEffects
The Churn Continues: Fastest Growing OccupationsThe 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
Chapter 13: Technological Progress, Wages, and Unemployment Slide #18Blanchard: Macroeconomics
Technological Progress & Distribution Technological Progress & Distribution EffectsEffects
The Churn Continues: Fastest Declining OccupationsThe Churn Continues: Fastest Declining Occupations1990 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
Chapter 13: Technological Progress, Wages, and Unemployment Slide #19Blanchard: Macroeconomics
Technological Progress & Distribution Technological Progress & Distribution EffectsEffects
The Increase in Wage InequalityThe 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 (%)
Chapter 13: Technological Progress, Wages, and Unemployment Slide #20Blanchard: Macroeconomics
Technological Progress & Distribution Technological Progress & Distribution EffectsEffects
The Increase in Wage InequalityThe Increase in Wage Inequality
Observations:Observations:
Explanations:Explanations:
Real wages for all workers have declined since 1979 whilelabor productivity has grown 1% per year since 1979.
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
Chapter 13: Technological Progress, Wages, and Unemployment Slide #21Blanchard: Macroeconomics
Technological Progress & Distribution Technological Progress & Distribution EffectsEffects
The Causes of Wage InequalityThe 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