Technology, wages and jobs
Outline
• Introduction
• Microeconomic models of innovation and
labour markets
• Innovation and labour markets: evidence
from firms
• Macroeconomic and trade models of
innovation and labour markets
Does new technology destroy jobs?
Two kinds of innovation with different impacts:
Process innovation – new ways of making and
delivering products
Effects of Process Innovation:
• New technique increases efficiency and thus
lowers costs of production
• Fewer workers can produce same output
• This can cause technological redundancy
BUT
• Cost reduction may lead firm to expand its
output as it gains market share
• Potentially this leads to more jobs on balance
Innovation to create demand
Product innovation – firm brings new varieties
and qualities of products to the market
Effects of Product Innovation:
• Firm can capture new or increased segments of
markets
• Again this is likely to lead to more jobs
Why the fear of new technology among workers?
This is a longstanding issue:
• Luddites (early 19th century England) smashed
new equipment being installed in textile industry
• Saw this as destroying their craft jobs and
permitting unskilled labour to take over their
work at lower wages
Technological progress which adds
to labour productivity
If assume a constant elasticity of substitution (CES)
production function and
cost minimisation in production of given output level
then it can be shown:
Demand for labour depends
positively on the level of output (Y),
negatively on the real wage (W/P),
Other influences are the degree of substitutability (σ)
between capital (K) and labour (L)
and the rate of labour-augmenting technological
progress (A) (improving productivity of labour)
ln L = ln Y – σ ln W/P + (σ – 1) ln A
What happens to demand for
labour as its efficiency improves?
Can also show that elasticity of labour demand
w.r.t. labour augmenting technol. change (ΔA) is:
ηLA = ηP θ + (σ – 1)
where (σ – 1) is the ‘substitution effect’ of ΔA:
+σ use more L as now more cost effective
-1 as get more output per worker by ΔA
and ηP θ is the ‘scale effect’ of expanding Y:
ηP is price elasticity of output demand
θ is production cost reduction effect of ΔA
Effects of improved technology
(if labour augmenting)
Good news for workers (ηLA is +ve) if:
• Capital and labour are easily substituted (σ is
large)
• Cost savings are passed through to customers
(θ is significant)
• Product demand is price elastic (ηP is large)
Bad news for workers (ηLA is -ve) if:
• Product has highly inelastic demand (ηP small)
• Cost savings are kept in firm to raise profits
(θ = 0)
• There is very little substitutability between capital
and labour (σ is small)
Employment growth and innovation in
firms in Europe 1998-2000
Source: Table 10.1 of Greenhalgh and Rogers drawn from
Harrison et al. NBER WP 14216 (2008)
France
Germany
Spain
UK
Manufacturing
employment growth
8.3
5.9
14.2
6.7
Process innovation
- 0.1
- 0.6
0.3
- 0.4
Product innovation
5.5
8.0
7.4
4.8
Services
employment growth
15.5
10.2
25.9
16.1
Process innovation
- 0.1
0.1
0.0
0.2
Product innovation
8.0
7.6
6.5
5.4
Innovation and wages in firms –
micro aspects
• Rent sharing with innovation
– Innovation raises profits and affords some
monopoly power to firm
– Firm shares some of returns to raise worker
loyalty (efficiency wage argument)
• New processes embodied in better machinery,
computers and robotics
– Increased productivity for complementary
workers raises their wages (designers,
programmers, managers, technicians)
– Reduced demand for substituted workers
causes lowering of their wages (shop floor
workers, call centre workers)
Innovation and wages
– micro evidence
• Van Reenen (1996) data for GB 1976-82
showed innovation led to rises in profits and rent
sharing occurred as 20-30% awarded to workers
in wage rises
• Greenhalgh et al. (2001) data for UK 1986-95
found positive effect on wages both when firm is
doing R&D and when making use of trademarks
(indicator of product launch)
• Krueger (1993) US data for 1980s, estimates
that workers using computers earned a premium
of 10 – 15%
• Entorf and Kramarz (1997) for France caution
that those selected to work with computers are
the more able, so wage gain is more modest
Innovation, jobs and wages
- the macro picture
Source: Table 10.1, drawn from Machin (2001)
Share of graduates in Relative wages of
total employment (%) graduates to nongraduates
US
UK
US
UK
1980
19.3
5.0
1.36
1.48
1990
23.8
10.2
1.55
1.60
2000
27.5
17.2
1.66
1.64
Reasons for the shift in demand
towards the skilled workers
In remainder of the lecture we compare three
possible sources of skill shift in demand for
labour in rich countries:
• Skill-biased technological change
• Globalisation and specialisation in trade
• Changes in composition of final demand
Perhaps all three have operated at once?
Relative wages, differential
productivity and supply growth
Source: Hornstein et al. 2005 and Greenhalgh & Rogers Box 10.2
Assume two types of labour, skilled and unskilled
with wages ws and wu respectively
Elasticity of substitution between labour types is σsu
Relative wage of skilled to unskilled labour is driven
by two ratios:
• Difference in productivity growth of each type of
labour
• Relative supply of each type of labour
Predictions of this model for
relative wages of skilled/unskilled
• If productivity of skilled labour rises faster than
that of unskilled labour, the relative wage for
skilled workers will rise
• If supply of skilled labour rises faster than that of
unskilled, then relative wage will fall
• The higher the degree of substitutability between
skilled and unskilled workers σsu then
– the larger is the positive effect of rising
relative productivity on relative wages
– the smaller is the negative effect of rising
relative supply
Three-input model - two types of
labour and capital equipment
Source: Hornstein (2005) and Greenhalgh & Rogers Box 10.2
Assume in this framework that unskilled labour is more
easily substitutable with equipment than is skilled
labour
The relative wage equation is now driven by three
elements:
• Difference in productivity growth of each type of
labour as above
• Relative supply of each type of labour as above
• The added effect driving demand for skilled labour is
that it is complementary with capital equipment
Predictions of three-input model for
relative wages of skilled/unskilled
• Relative wage of skilled workers rises with any
increase in ratio of equipment to skilled labour
• Innovation has improved productivity of capital,
so an increase in capital intensity has occurred
• Big rise in computer use, especially in services
sector, has increased demand for skilled labour
• In manufacturing the use of robots and other
automation has reduced demand for unskilled
• Evidence for US - these factors explain much of
change in relative wages from 1960s to 1990s
Globalization - Is international trade
also skill biased?
• Asian development 1970s & 80s ‘the Asian
tigers’ (Hong Kong, Singapore, S. Korea Taiwan)
- made small inroads into Western
manufacturing
• More Asian development 1990s (China and
India) jointly have 37% of world population) so
have much larger impact on world trade
• HOS model of trade based on domestic factor
endowments predicts specialisation by factors
• Opening up of countries with large supply of low
cost unskilled labour leads rich countries to
specialise in goods using skilled labour
• Employment and wages of unskilled labour in
West expected to fall (see Wood 1994)
Demand - A third cause of skill bias?
• Income growth in rich countries has been steady
and sustained over last 25 years
• Composition of demand will change due to
varying income elasticity of demands for goods
and services
• Luxuries (income elastic) account for more
spending than necessities and demand for
inferior goods falls as incomes rise
• High technology innovative products require
skilled labour to design and produce and
• Relative demand for these will grow as these
innovative products will be in luxury category
Three causes of skill bias in
demand for labour, UK 1979-90
Source: Greenhalgh and Rogers Table 10.3,
from Gregory et al. Oxford Economic Papers, 2001
Total %
Final
change in
demand
employment
Net
exports
Technological
change
High skill
28.8
28.2
– 4.1
4.6
Intermediate
skill
0.1
21.1
– 4.8
– 16.2
– 14.9
17.9
– 5.7
– 27.1
3.5
22.0
– 4.8
– 13.7
Low skill
Total
change
Questions for Discussion
1. Can the ‘Luddite view’ be justified?
2. Why does it matter whether or not technical
change is factor-biased?
3. Why is the impact of innovation on wages and
employment difficult to determine?
4. Discuss the trends in relative wages of skilled
to unskilled workers in your country.
5. What forces might affect relative wages in
(a) developed economies
(b) developing countries?
References
• P Cahuc and A Zylberberg (2004) Labor Economics,
Chapter 10: Technological Progress, Globalization and
Inequalities, parts 2 and 3.
• Hornstein, A., P. Krusell and G. L. Violante (2005), 'The
effects of technical change on labor market inequalities',
in Handbook of Economic Growth, Volume 1B, P. Aghion
and S. Durlauf, (eds.), Amsterdam: North
Holland/Elsevier B.V.
• Machin S. (2001), 'The changing nature of labour
demand in the new economy and skill-biased technical
change', Oxford Bulletin of Economics and Statistics, 63,
Special Issue: The Labour Market Consequences of
Technical and Structural Change, 753-76.
• Wood, A. (1994), North-South Trade Employment and
Inequality, Oxford, Clarendon Press.