Technological Progress Flashcards
Technological progress & firms
- firms can earn innovation rents by introducing new technology
- firms that can’t keep up will fail (creative destruction)
- output depends on labour input and the production shifts upward with technological progress
- modern workers use a greater amount of capital goofs
Cobb-Douglas Production function
output is a function of capital stock and labour
Y = AK^(alpha) x (N)^(1-alpha)
where
Y = output
K = capital stock
A = total factor productivity that also increases in the technology in use
alpha = share of capital stock used 0
assumptions for production functions
- function exhibits constant returns to scale
- technological progress is labour-saving
- Production function is characterised by diminishing returns to capital
production function simplified
Y = AK^alpha
Y/N = output per worker
K/N = capital per worker
shows that outer per worker depends on capital per worker and total factor productivity that includes technology
Technological progress and capital goods accumulation are complimentary
- new technologies require new machines
- technological advance is needed for increasingly capital intensive methods of production to be profitable
this allows a sustained increase in average living standards
Modelling technological progress
- assume diminishing returns to capital
- use a concave production function of output per worker against capital per worker
slope = marginal product of capital
- production function shifts up with technological progress
this increases the APL and offsets the diminishing marginal returns to capital making it profitable to invest domestically leading to increased capital intensity
- capital intensity higher with higher output per worker
Why does capital productivity remain constant over time in technology leaders?
these countries experienced a combination of capital accumulation and technological progress
Technological progress results in
- Process innovation - new ways of making and delivering products
- Product innovation - new varieties and qualities of products to the market
Job creation and destruction process
labour-saving technological progress can also create jobs
- reallocation of work from low to high productivity firms
- job creation is strongly pro cyclical whereas job destruction is countercyclical
Beveridge curve
shows the inverse relationship between the unemployment rate and the job vacancy rate
as unemployment rate rises, there’s less efficient job matching
- during recessions, firms post fewer vacancies
- in booms, they post more
- Newly posted vacancies are not filled instantly because of issues with labour market matching
Long run labour market model
output, employment, prices, wages, capital, institutions and technologies can adjust
long run employment depends on how well policies and institutions deal with
- work incentives - depends on long run WS curve
2. investment incentives - depends on long run PS curve
assumptions of long run labour market model
- firms are all of a given size
- changes in capital stock determined by entry or exit of firms
- constant returns to scale (CRS)
what determines how the number of firms change in the long run?
the markup, mew
- high markup attracts entry of firms, low promotes exit of firms
self-correcting process of number of firms
more firms means more competition leading to higher elasticity of demand facing firms, so leads to lower markup leading to exit of firms
mew = 1/elasticity of demand
What can shift the equilibrium markup?
improvement in the business operating environment
- an improvement due to legislation (e.g property protection)
- equilibrium markup then shifts downward
Long-run PS curve
- real wage depends on productivity of labour (lamda) and equilibrium markup (mew*)
long run PS curve is thus:
real wage (w) = lamda(1-mew*)
- with constant returns to scale, the long run price setting curve is flat
what shifts the long run PS curve
- output per worker - PS curve higher the higher the output per worker
- Markup - PS curve higher the lower the long run markup at which firm entry and exit is zero
What changes the markup at which entry and exit are zero?
- Competition - markup falls with more competition
- Risk of expropriation - lower the risk, more firms enter, markup falls
- Quality of human capital or infrastructure - if its better, more firms enter, markup falls
- Expected long run tax rates - lower means higher profits for firms, more firms enter, markup falls
- Opportunity cost of capital - if lower, firms invest in capital, firms enter, markup falls (e.g interest rates on bonds)
- Expected material costs - lower, firms enter, markup falls
- Expected profits on foreign investments - lower, firms invest domestically, more competition so markup falls
technological improvement in labour market model
- new technology can increase both real wages and employment in the long run
what determines the rate of increase in the productivity of labour?
- adjustment gap - adjustment process takes time and may involve job destruction in the short run
lag between some outside change in labour Market conditions and the movement to the new equilibrium
- diffusion gap - the lag between the first introduction of an innovation and it’s general use - if gap closed then productivity increases
what changes the diffusion gap and the size of the wage adjustment gap?
- public policies: providing job matching and limited unemployment benefits
- trade unions: supporting policies that hasten creative destruction, and hasten exit of unproductive firms
- employment association policies: support policies to exit unproductive firms
Introducing a new technology
- shifts output per worker and price setting curve upwards
- leads to a rise in unemployment
- high profits encourage new firms to enter
- leads to lower unemployments and thus leads to rising real wages
- new long run unemployment rate is lower
to achieve good economic growth an economy must
- ensure the PS curve shifts up more than the WS curve
- adjust rapidly and fully so the whole economy benefits from technological progress
Role of institutions
- inclusive trade unions:
one that represents many firms and sectors but chooses not to exercise maximum bargaining power because wage increases affect job creation in the long run
Role of policies
well designed unemployment insurance schemes and job placement services can achieve low unemployment rates
Institutions and policies used differ across successful countries over time
Norway example
- inclusive trade unions and employers’ associations
- set wage demands in accordance with the productivity of labour
- supported legislation and policies that shifted the WS curve downwards
- long run employment expanded
Japan example
- employers’ associations coordinate WS across firms
- corporations deliberately don’t compete in hiring workers to avoid rising wages
Spain example
- a combination of non-inclusive unions and govt legislation that protects jobs rather than workers
- may help to account for Spain’s poor labour market performance
Why is changing institutions and policies difficult?
because it creates winners and losers
UK and Netherlands example
- both had increased unemployment rates in the 1970s due to the oil price shocks and the increase bargaining power of labour
- PS curve shifted down and WS curve shifted up
In the Netherlands institutions became more inclusive
in the UK policies reduced the power of non-inclusive unions
both institutions and policies reduced unemployment rates
