Chapter 10: Technology Wages & Jobs

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.