Unit 16 ECO2004S
Technological Progress, Employment & Living Standards in
Long Run
Context
o Many were nervous that technological progress would lead to job losses
(Luddite movement; Sismondo; Rifkin)
o But, because of labour-saving innovations, the Industrial Revolution occurred.
many countries moved to the upward part of the hockey stick and
experienced sustained growth in living standards
real wages rose
o Therefore the fears weren’t valid
lowest wage firms can pay while still covering costs has increased, which
expands the resources the firm has to invest in increasing production,
and it also incentivizes continued investment.
By focusing only on the destruction of jobs, those who worry about the
“end of work” have ignored the fact that labour-saving technological
progress also induces the investment that helps to create jobs.
Creative Destruction (Schumpeter)
o Process by which old technologies and the firms that do not adapt are swept
away by the new, because they cannot compete in the market.
o How does it occur?
Firms can earn innovation rents by introducing new technology.
Firms that cannot keep up with innovation eventually fail = creative
destruction
o In Schumpeter’s view, the failure of unprofitable firms is creative because it
releases labour and capital goods for use in new combinations.
o Disadvantages and advantages
Unemployed face substantial costs in short run
Specific communities/regions could be affected for generations
But future generations benefit as they will get more productive jobs, and
share in the benefit from the new goods and services that are available
because of technology
Most people benefit from the fall in prices due to the new technology.
Although many do lose their jobs, other jobs are created
Technological Progress
o Refers to the discovery of new and improved methods of producing goods
o Many dimensions:
Larger quantities of output produced in less time, better products, new
products, larger variety of products
o Involves 2 activities: Process innovation and product innovation
o Leads to increases in output for given amounts of capital and labour
o Technological progress and accumulation of capital goods = complementary
each provides the conditions necessary for the other to proceed.
New technologies require new machines
, Unit 16 ECO2004S
Technological advance is needed for increasingly capital-intensive
methods of production to be profitable
Standard of living
o Measured with output per person
o
o Comparing between countries issues:
Exhange rates vary a lot
Systematic differences in prices across countries.
In general, the lower a country’s output per capita, the lower the prices
of food and basic services in that country.
o Comparing between countries solutions:
Purchasing power parity
• Use a common set of prices for all countries.
• Adjust real GDP numbers using these prices.
o Welfare measured by consumption
Production function: Technological Improvement
o Rotates the production function upwards
o This increases the APL and offsets the diminishing marginal returns to capital.
o = profitable to invest domestically, leading to increased capital intensity.
Shifts function up =
increase in
output/worker for given
level of capital/worker.
dotted blue line goes from origin through the
functions for the old and new technologies. Its slope
is the average product of capital
Production Function: Marginal Product of Capital
o ΔY/ΔK
o slope of the tangent to the production function at level of capital per worker
o falling as we move along the production function to higher capital intensity
o concavity: at some pt, MPK so low that investment no longer worth it
Technological Progress, Employment & Living Standards in
Long Run
Context
o Many were nervous that technological progress would lead to job losses
(Luddite movement; Sismondo; Rifkin)
o But, because of labour-saving innovations, the Industrial Revolution occurred.
many countries moved to the upward part of the hockey stick and
experienced sustained growth in living standards
real wages rose
o Therefore the fears weren’t valid
lowest wage firms can pay while still covering costs has increased, which
expands the resources the firm has to invest in increasing production,
and it also incentivizes continued investment.
By focusing only on the destruction of jobs, those who worry about the
“end of work” have ignored the fact that labour-saving technological
progress also induces the investment that helps to create jobs.
Creative Destruction (Schumpeter)
o Process by which old technologies and the firms that do not adapt are swept
away by the new, because they cannot compete in the market.
o How does it occur?
Firms can earn innovation rents by introducing new technology.
Firms that cannot keep up with innovation eventually fail = creative
destruction
o In Schumpeter’s view, the failure of unprofitable firms is creative because it
releases labour and capital goods for use in new combinations.
o Disadvantages and advantages
Unemployed face substantial costs in short run
Specific communities/regions could be affected for generations
But future generations benefit as they will get more productive jobs, and
share in the benefit from the new goods and services that are available
because of technology
Most people benefit from the fall in prices due to the new technology.
Although many do lose their jobs, other jobs are created
Technological Progress
o Refers to the discovery of new and improved methods of producing goods
o Many dimensions:
Larger quantities of output produced in less time, better products, new
products, larger variety of products
o Involves 2 activities: Process innovation and product innovation
o Leads to increases in output for given amounts of capital and labour
o Technological progress and accumulation of capital goods = complementary
each provides the conditions necessary for the other to proceed.
New technologies require new machines
, Unit 16 ECO2004S
Technological advance is needed for increasingly capital-intensive
methods of production to be profitable
Standard of living
o Measured with output per person
o
o Comparing between countries issues:
Exhange rates vary a lot
Systematic differences in prices across countries.
In general, the lower a country’s output per capita, the lower the prices
of food and basic services in that country.
o Comparing between countries solutions:
Purchasing power parity
• Use a common set of prices for all countries.
• Adjust real GDP numbers using these prices.
o Welfare measured by consumption
Production function: Technological Improvement
o Rotates the production function upwards
o This increases the APL and offsets the diminishing marginal returns to capital.
o = profitable to invest domestically, leading to increased capital intensity.
Shifts function up =
increase in
output/worker for given
level of capital/worker.
dotted blue line goes from origin through the
functions for the old and new technologies. Its slope
is the average product of capital
Production Function: Marginal Product of Capital
o ΔY/ΔK
o slope of the tangent to the production function at level of capital per worker
o falling as we move along the production function to higher capital intensity
o concavity: at some pt, MPK so low that investment no longer worth it
