Topic 4 -Technological change,

employment and wages

P Cahuc and A Zylberberg (2004) Labor Economics, Chapter 10:
Technological Progress, Globalization and Inequalities, parts 2 and 3.

C Greenhalgh and M Rogers (2010) Innovation, Intellectual Property
and Economic Growth, Chapter 10: Technology, Wages and Jobs,
Princeton University Press.

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.
Professor Christine Greenhalgh
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 19
th
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
Labour augmenting technological
progress with two factors
If assume a CES production function and cost minimisation in
production of given output level then it can be shown:
Demand for labour depends on
level of output (Y),
real wage (W/P),
degree of substitutability () between capital (K) and labour (L)
the rate of labour augmenting technological progress (A)
ln L = ln Y ln W/P + ( 1) ln A
Source: Van Reenen (1997) J. Lab Econ.
Summary in Greenhalgh and Rogers Ch 10
What happens to demand for
labour as its efficiency improves?
From the above model it can be shown that elasticity of labour
demand w.r.t. labour augmenting technol. change (A) is:

LA
=
P
+ ( 1)
where ( 1) is the substitution effect of A:
+ use more L as now more cost effective
1 as get more output per worker by A
and
P
is the scale effect of expanding Y:

P
is price elasticity of output demand
is production cost reduction effect of A
Effects of A (labour augmenting)
Good news for workers (
LA
is +ve) if:
Capital and labour are easily substituted ( is large)
Cost savings are passed through to customers ( is significant)
Product demand is price elastic (
P
is large)
Bad news for workers (
LA
is -ve) if:
Product has highly inelastic demand (
P
small)
Cost savings are kept in firm to raise profits
( = 0)
There is very little substitutability between capital and labour ( is
small)

Employment growth and innovation in
firms in Europe 1998-2000
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
Source: Table 10.1 of Greenhalgh and Rogers drawn from Harrison et al.
NBER WP 14216 (2008)
Features of this data from
Community Innovation Survey
Expansion of services employment approx. twice that in
manufacturing firms over two year period
Consistency across four EU countries in relative size of product
and process innovation effects
Firms introducing new products attributed a significant share of
their employment growth to this activity
Process innovation was broadly neutral, with biggest negative
effect being 0.6% in Germany
Do these findings lay the Luddites to rest?
Time series empirical evidence
about innovation and employment
Greenhalgh et al. Scottish JPE, V 48(3) 2001
Data panel of UK industrial firms 1987-94
Estimated demand for labour function including measures of their
innovative activities
Doing R&D associated with raised employment
Predicted effect of doubling R&D (= German levels) in R&D active
firms -> 2.6% rise in jobs
Gaining patents also gives higher employment
One more patent per firm -> 0.4% rise in jobs
Dividing sample by high-tech and low-tech:
R&D impact larger (4%) in high-tech sectors
patent impact larger (1%) in low-tech sectors
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 - 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 earn 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
Unions and innovation - theory
Are unions a negative force? If they raise wages and resist
changes to work practices does this reduce firms incentive to
innovate?
Interaction between product markets and structure of bargaining
makes a difference to their impact (Dowrick and Spencer)
Resistance to new technology is more likely if craft or industry
union and oligopoly product market
Resistance is less likely if enterprise union and competitive
product market
Are unions a positive force? (Freeman and Medoff) If unions
improve workers job satisfaction and improve communications,
then turnover falls, training improves, perhaps innovation more
likely?
Unions and innovation evidence
(Summarised in Greenhalgh and Rogers Ch 10)
Evidence for US (Hirsch) indicates unions have a negative effect
on both capital investment and level of R&D
Evidence for UK (Menezes Filho et al.) says this simple
correlation is due to most unionised firms being in declining
industries
Results for UK and US differ because unions in UK want to
protect jobs but in US want to raise wages
Evidence for UK that union presence raises vocational training
(Booth et al.)
Evidence for UK that industry skill shortages are associated with
lower investment and reduced R&D (Nickell and Nicolitsas)
Innovation, jobs and wages
- the macro picture
Share of graduates in
total employment (%)

US UK
Relative wages of
graduates to non-graduates

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
Source: Table 10.1 of Greenhalgh and Rogers drawn from Machin (2001)
Ox Bull Ec & Stats Vol 63 Special Issue
Change in ratio of earnings at the
median to bottom decile (D5/D1)
Late 1970s Mid 1990s Change
France 1.68 1.60 0.08
Germany 1.52 1.46 0.06
Japan 1.58 1.60 0.02
UK 1.58 1.80 0.22
US 1.93 2.20 0.27
Source: Cahuc and Zylberberg Table 10.2
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
Assume two types of labour, skilled and unskilled with wages w
s
and
w
u
respectively
Elasticity of substitution between labour types is
s

Relative wage of skilled to unskilled labour is driven by two ratios:
Difference in productivity growth of each type of labour, A
s
/ A
u

Relative supply of each type of labour, l
s
/ l
u


1 1
ln ln ln
s s s s
u s u s u
w A l
w A l
o
o o
( | | ( | |

=
| |
( (
\ . \ .
(Source: Katz and Murphy 1992, in Hornstein 2005)
Predictions of simple model for
relative wage of skilled/unskilled
If productivity of skilled labour rises faster than that of unskilled
labour, 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 (value of o
s
) then
the larger is the positive effect of rising relative productivity on
relative wages
the smaller is the negative effect of rising relative supply
Model with two types of labour and
capital equipment
Elasticity of substitution between unskilled labour and equipment is
o
ue
= 1/(1-|),
and for skilled labour and equipment is o
se
= 1/(1-)
Unskilled labour is more easily substitutable with equipment than is
skilled labour o
ue
> o
se
(| > )

The relative wage equation now has three elements:
1 1 ( )
ln ln ln
s ue s s e
u ue u ue u s
w A l k
w A l l

o |
o o
( | | ( | | | |

= +
| | |
( (
\ . \ . \ .
Source: Hornstein, or see Greenhalgh and Rogers
Predictions of three-input model for
relative wages of skilled/unskilled
Added effect driving demand for skilled labour is it is
complementary with capital equipment
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
Total %
change in
employment
Final
demand
Net
exports
Technological
change
High skill
28.8 28.2 4.1 4.6
Intermediate
skill
0.1 21.1 4.8 16.2
Low skill
14.9 17.9 5.7 27.1
Total change
3.5 22.0 4.8 13.7
Source: Greenhalgh and Rogers Table 10.3,
from Gregory et al. Oxford Economic Papers, 2001
Implications of these empirics
Calculations used Leontief Input-Output model with linear
production technology
This attributes all output growth to the category change in final
demand even if some is due to product innovation
Technological change effect is measured by factor inputs
needed to produce a constant output
Changing technology in production gave rise to biggest relative
demand shift to skills (30% twist)
Growth in final demand added to relative demand shift (10%
difference in growth)
Trade shows rather modest effects (but database pre-dates rapid
growth of China)
Technology changes may be stimulated by trade