Technological Progress and Unemployment

Abstract

By introducing a wage-setting equation derived from efficiency wage or bargaining hypotheses, the standard neoclassical growth model is extended to one where there is persistent unemployment. In this model, if the labor share of income is above (below) the elasticity of substitution between capital and labor, firms tend to introduce labor-saving (capital-saving) technological progress, and the employment rate decreases (increases) as a result. We then develop an induced innovation model including unemployment. We show that (a) if the elasticity of substitution is less than unity but greater than the labor share of income, the steady state with a constant rate of unemployment is stable, but convergence is oscillatory; (b) if the elasticity of substitution is less than the labor share of income, both the employment rate and labor share of income are decreasing under labor-saving technological progress; (c) if the elasticity of substitution is greater than unity, there is a unique steady state equilibrium with a saddle point property. Finally, comparing firms’ optimization to social welfare optimization, there will be a bias toward excessive labor-saving technological progress, resulting in unemployment that is too high and a labor share of income that is too low if the elasticity of substitution is less than unity.