File 20: Technology and aggregate employment

Question 1

What are other examples of technology eliminating jobs (ex: containers, cutting machines in mercure)? (3)

Answer 1

1. In the early 19th century workers in the hosiery and lace industries in England broke up
   knitting machines. They were called Luddites and were motivated by fears of job
   elimination.
2. When transportation in horse-drawn carriages was replaced by streetcars and railways,
   large numbers of jobs were eliminated.
3. The development of the microchip and computerization has eliminated large numbers of
   jobs: i) the Swiss watch industry ii) electronic cash registers required one quarter of the manufacturing labour that mechanical cash registers had required; iii) computerized typesetting reduced employment in the printing industry by a lot; iv) the availability of news through the internet has eliminated newspapers.

Question 2

What is the aggregate effect of technological innovation according the Alfred Sauvy? (evidence on the association between technological innovation and the state of the labour market) (2)

Answer 2

1.industrial revolution: labour productivity and employment rose
2. Countries with high unemployment have low productivity growth. (ex: countries in development)
Japan had spectacularly high productivity growth until about 1990. It also had very low unemployment.

Question 3

What does Jeremy Rifkin argue about techonological innovation and the state of the labour market?

Answer 3

says bc this has occured in the past (alfred sauvy’s theory: high unemployment have low prod growth) wont happen necessairly in future bc the amount and speed of innovation, associated with information and computer technology (ICT), are destroying jobs which will never be replaced. The result is rising unemployment in both the rich world and in poor countries.

Question 4

What is unemployment?

Answer 4

People who i) do not have employment and ii) are
seeking work (in Canada, unless they are on a temporary lay-off).

Question 5

What is unemployment rate?

Answer 5

Number unemployed/number in the labour force.

Question 6

What is labour force?

Answer 6

Those who are either employed or unemployed.

Question 7

what is not in labour force?

Answer 7

inactive

Question 8

What do Cross-country evidence on unemployment rates from 1993 to 2012 reveals?

Answer 8

i) no clear trend - they rise in some countries but not in others
ii) considerable differences across countries in levels. suggest that there are differences between countries, possibly in their institutions, which produce higher or lower rates of unemployment. (Be careful
interpreting rises in the 2008-2012 period; they reflect the effects of the 2008 financial crisis.)

Question 9

Does the official rate of unemployment provide a reliable indicator of the state of the labour market? (4)

Answer 9

1. discouraged worker effect: People may not seek jobs because they think there is no realistic prospect of finding one.
   (may be offset by an ‘added worker effect’, when the loss of a job by one member of a household induces another member to take a job)
2. Governments may find ways to remove people from the unemployment rolls through training programs, early retirement incentives, a permissive attitude to disability leaves, or through the provision of government jobs.
3. People may take jobs that are for some reason unsatisfactory because no satisfactory jobs are available. (part time, temp job, doesnt match skills)
4. The unemployment rate may go up when good numbers of jobs are being created because people respond to improving conditions by engaging in job search activity.
   CONC=>does not provide a reliable indicator of the state of the labour market. A given rate may overstate or understate the health of the labour market.

Question 10

What are other indicators of the labour market? and their trends

Answer 10

1. Labour force participation rates = (employed+unemployed)/total number in age group (decline appreciably for males 15-64 in some countries but are stable in most
   ( Labour force participation rates for females have tended to rise)
2. Involuntary part-time employment has risen in a number of countries but fallen in others. 8. As for unemployment rates, differences in trends and levels of both labour force participation and involuntary part-time employment suggest the effect of institutions.

Question 11

What is product innovation? and its relation with labour market?

Answer 11

A new product is created, something that people did not previously have available to consume (railroad travel, automobiles, televisions, cell phones, diagnostic kits). It is usually assumed that product innovations have large employment-creating effects. New goods create new wants which are translated into large demand effects. The growth in demand in the ICT industry as new uses for the GPT were found are a good example of this.

Question 12

What is process innovation? and its relationship to labour market?

Answer 12

Suppose that there is a process innovation in one or a few industries (in, say, paper, or steel, or automobile manufacture) which reduces the demand for labour in this sense: there is a reduced labour input per unit of output. Need this create unemployment? Not necessarily!

Question 13

What are offset mechanisms that lead to unemployment or employment?

Answer 13

UNEMPLOYMENT:
The new equipment has to be constructed. This may partially offset the loss of
employment in the industry purchasing the new capital equipment.
(But if the capital goods industry just switches from producing the old to the new machine there need be no net offsetting increase in employment.)
EMPLOYMENT
Innovation takes place (often) to reduce the costs of production. Reduced cost in a competitive environment leads to reduced price. Reduced price is likely to increase
demand.
1. If an owner introduces new equipment and reduces the cost of production before
competitors that owner gets a transitory advantage over competitors. That employer’s profits rise and may be spent on local goods, creating employment.
2. If there is labour displacement as a result of an innovation, and if there is a reasonably competitive labour market, then wages in the labour market are likely to fall and that should lead to a rise in employment. (The relative desirability of labour and capital will have changed.)

Question 14

Offsetting mechanisms have been described to include falling price or falling wages. Give examples of offsetting mechanism that do not lead to such. (2)

Answer 14

1. in a noncompetitive market a labour-saving innovation may reduce cost but not price, so
   demand won’t rise;
2. in some labour markets a strong union movement (possibly made strong by government
   support) may prevent wage falls.

Question 15

Why are europe and north america often contrasted when talking about employment, wages and prices?

Answer 15

europe is thought to have inflexible prices and wages and america had flexible prices and wages

Question 16

Explain the aggregate employment, technology and unemployment model using time and expectation.

Answer 16

1.Assume that labour is employed in two industries: Industry I manufactures machinery;
Industry II uses the machinery manufactured by Industry I to manufacture goods for sale
to consumers.
2.Industry II must decide on the output to produce and then order the correct amount of
machinery from Industry I to produce that output.
3.What does Industry II use to decide on it output? It forecasts future demand on the basis
of past sales. It orders equipment from Industry I on the basis of those forecasts.
4.At the outset, Industry I produces exactly the right output to meet the needs of Industry II,
given Industry II’s sales/demand forecast.
5.Suppose there is a labour saving innovation in Industry I; that is, suppose it devises new
equipment to be sold to Industry II with which Industry II can produce the same amount of output as before but with less workers. The effect of this will be to cause employment to fall in Industry II.
6.The fall in employment in Industry II causes a reduction in aggregate demand.
7.Reduced demand means that Industry II has unsold output. It bases its orders from
Industry I on the basis of its previous sales experience. Its fall in sales causes Industry II to revise down its sales/demand forecast and, consequently, to order less equipment from Industry I.
8.This causes Industry I to lay off employees. There is a further rise in employment and fall in aggregate demand.
9.And so on. There is a downward spiral of demand and employment which may be offset by government stimulation of aggregate demand.
10.The problem here is that the expectations of the managers in Industries I and II are assumed to be adaptive. That is, they are entirely based on previous experience, that is, previous sales. Suppose their expectations were rational. If that were the case they might take into account the offsetting mechanisms discussed above and forecast sales taking into account price falls, wage falls, extra income spent by owners, and the (possible)
hiring of new employees to build (in Industry I) or install (in Industry II) the new
equipment. They might not end up laying off workers.

Question 17

Where is technological unemployment more likely? (4)

Answer 17

1. wages are rigid;
2. prices are rigid;
3. there is an absence of profitable investment opportunities (possibly linked to the previous
   points) so that profits aren’t invested locally;
4. and expectations are adaptive rather than rational.