Chapter 13: Technological Progress, Wages, and Unemployment Slide #1 Blanchard: 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 Observation s: Technological Progress, Wages, and Technological Progress, Wages, and Unemployment Unemployment Two Interpretations of the Observations: 1. Optimistic: More output with the same workers 2. Pessimistic: Same output with fewer workers
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:. - PowerPoint PPT Presentation
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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
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
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.