Embodied Technological Change and Tests of the Internal-Adjustment-Cost Hypothesis

Abstract

Several recent studies analyzing labor-productivity changes have focused on the existence and measurement of the internal costs of adjustment attendant on investment in new-capital goods. These internal-adjustment costs are those borne directly by firms purchasing new-capital goods and include such costs as those associated with setting up the new capital, learning the operation of the new equipment, and assimilating the new factors into the production process. Such costs need not be explicit, as in the cost of training programs, but can take the form of a reduction in ordinary output, such as resources diverted from the production of regular output to accommodate the adjustment costs of new investment. (Internal-adjustment costs should be distinguished from the well-known external costs of adjustment, such as the increasing marginal resource costs of delivering the desired level of capital goods to industries.) Failure to consider these costs can have far-reaching effects in several areas. One such area is the analysis of the impact of new investment on output and productivity. If these internal-adjustment costs are significant and important, the