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
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #1
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?
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #2
Productivity, Output, and Unemployment
in the Short Run
Technological Progress, Aggregate Supply, &
Aggregate Demand -- A Review
Price Level, P
AS (A)
• AD: P => (M/P) => i => Y
• AS: Given Pe,
Y => u => W => P
• Equilibrium Y, P, equilibrium
in labor, goods, &
financial markets
P
• N = Y/A
AD (A)
Y
Output, Y
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #3
Productivity, Output, and Unemployment:
The Short Run
Technological Progress, Aggregate Supply, &
Aggregate Demand -- A Review
Price Level, P
AS (A)
AS´ (A´)
• Productivity increases
A to A´
• At A´ production
cost & AS shifts to
AS´ (A´)
P
• The impact A´ on AD
is uncertain: assume
AD´ (A´)
AD´ (A´)
• Equilibrium Y
increases to Y1
AD (A)
Y
Blanchard: Macroeconomics
Y1
Output, Y
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #4
Productivity, Output, and Unemployment:
The Short Run
Did the increase in productivity increase
employment? The Empirical Evidence
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #5
Productivity, Output, and Unemployment
in the Short Run
The Empirical Evidence
Observation:
Question:
Hint:
Strong positive relation between output
growth and productivity growth
But what is the causation?
Okun’s Law & labor hoarding during recessions
Conclusion:
When an exogenous change in productivity
(technology) occurs--sometimes unemployment
rises and sometimes falls in the short-run.
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #6
Productivity and the Natural Rate of
Unemployment -- the Medium Run
Price Setting & Wage Setting Revisited
Price Setting:
W
P  (i   )
A
W
If A increases,
falls, which lowers P given W
A
Wage Setting:
W  AeP eF (u, z )
the expected level of productivity is incorporated
into wages set in bargaining.
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #7
Productivity and the Natural Rate of
Unemployment -- the Medium Run
The Natural Rate of Unemployment
Assuming expectations of prices and productivity
are correct:
W
P  (i   )
Price Setting:
A
W
A W

:
Real Wages:
depends on A&u
P 1  P
Wage Setting:
W  AeP eF (u, z)
Pe=P & Ae=A
W
W
 AF (u, z ) :
Real Wages:
depends on A,u,
P
P &z
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #8
Productivity and the Natural Rate of
Unemployment -- the Medium Run
The Natural Rate of Unemployment
A´F(u,z)
• A increases 5%
AF(u,z)
• A´ = 1.05A
Real Wage, W/P
A´
• 1  increased 5%
• A´F(u,z) increased 5%
B´
A´
1 
A
1  ´
• un unchanged
Price
setting
B
Wage setting
un
Unemployment Rate, u
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #9
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?
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #10
Productivity and the Natural Rate of
Unemployment -- the Medium Run
The Empirical Evidence
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #11
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
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #12
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
W
A

Then:
Price setting
P 1 
Wage setting
And:
W
 AeP eF (u, z )
P
Ae>A when productivity slows down
Question: What will happen to unemployment?
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #13
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
• Equilibrium B to B´
B´
Price
setting
B
• The natural rate increases
from un to u´n
Wage setting
un
u´n
Unemployment Rate, u
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #14
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?
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #15
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
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #16
Technological Progress & Distribution
Effects
The Churn Continues: Fastest Growing Occupations
Home health aides
Systems analysts and
computer scientists
Medical assistants
Human service workers
Radiologic technologists &
technicians
Medical secretaries
Psychologists
Travel agents
Correction officers
1990
(thousands)
2005
(thousands)
Change
(%)
287
550
+92%
463
165
145
829
287
249
+79%
+74%
+71%
149
232
125
132
230
252
390
204
214
342
+70%
+68%
+64%
+62%
+61%
Source: Statistical Abstract of the United States, 1993, table 645
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #17
Technological Progress & Distribution
Effects
The Churn Continues: Fastest Declining Occupations
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
1990
(thousands)
2005
(thousands)
Change
(%)
171
232
90
128
-48%
-45%
314
190
-40%
199
138
-31%
133
92
-30%
145
104
-29%
411
246
1074
310
189
822
-25%
-25%
-21%
585
368
-20%
Source: Statistical Abstract of the United States, 1993, table 645
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #18
Technological Progress & Distribution
Effects
The Increase in Wage Inequality
Real Wage Changes for Full-Time Workers 1963 -1995 (%)
1963-1979
1979-1995
All Workers
17.7
-11.2
By education (years of schooling)
0-11 (less than high school)
12 (high school)
13-15 (less than 4 years of college)
16+ (4 years of college or more)
18+ (graduate school)
17.2
18.8
17.7
18.9
25.8
-20.2
-13.4
-12.4
3.5
14.0
By sex
Men
Women
18.3
16.8
-17.4
-1.5
Source: Lawrence Katz and David Autor, “Changes in the Wages Structure and Earnings Inequality”
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #19
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
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #20
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
Blanchard: Macroeconomics
Chapter 13: Technological Progress, Wages, and Unemployment
Slide #21