Topic 4 -Technological change, employment and wages

1
Topic 4 -Technological change, employment and
wages
Professor Christine Greenhalgh

• 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.

2
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

3
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 19th 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

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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 (s) between capital
  (K) and labour (L)
• the rate of labour augmenting technological
  progress (A)
• ln L ln Y s ln W/P (s 1) ln A
• Source Van Reenen (1997) J. Lab Econ.
• Summary in Greenhalgh and Rogers Ch 10

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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 ? (s 1)
• where (s 1) is the substitution effect of ?A
  
• s 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

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Effects of ?A (labour augmenting)

• Good news for workers (?LA is ve) if
• Capital and labour are easily substituted (s 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 (s is small)

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Employment growth and innovation in firms in
Europe 1998-2000
Source Table 10.1 of Greenhalgh and Rogers drawn
from Harrison et al. NBER WP 14216 (2008)
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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?

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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 RD associated with raised employment
• Predicted effect of doubling RD ( German
  levels) in RD active firms -gt 2.6 rise in jobs
• Gaining patents also gives higher employment
• One more patent per firm -gt 0.4 rise in jobs
• Dividing sample by high-tech and low-tech
• RD impact larger (4) in high-tech sectors
• patent impact larger (1) in low-tech sectors

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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)

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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 RD 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

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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?

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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 RD
• 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 RD
  (Nickell and Nicolitsas)

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Innovation, jobs and wages - the macro picture
Source Table 10.1 of Greenhalgh and Rogers drawn
from Machin (2001) Ox Bull Ec Stats Vol 63
Special Issue
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Change in ratio of earnings at the median to
bottom decile (D5/D1)
Source Cahuc and Zylberberg Table 10.2
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Reasons for the shift in demandtowards 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?

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Relative wages, differential productivity and
supply growth
(Source Katz and Murphy 1992, in Hornstein 2005)

• Assume two types of labour, skilled and unskilled
  with wages ws and wu respectively
• Elasticity of substitution between labour types
  is ss
• Relative wage of skilled to unskilled labour is
  driven by two ratios
• Difference in productivity growth of each type of
  labour, As / Au
• Relative supply of each type of labour, ls / lu

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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 ?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

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Model with two types of labour and capital
equipment
Source Hornstein, or see Greenhalgh and Rogers

• Elasticity of substitution between unskilled
  labour and equipment is ?ue 1/(1-?),
• and for skilled labour and equipment is ?se
  1/(1-?)
• Unskilled labour is more easily substitutable
  with equipment than is skilled labour ?ue gt ?se
  (? gt ? )
• The relative wage equation now has three
  elements

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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

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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)

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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

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Three causes of skill bias in demand for labour,
UK 1979-90
Source Greenhalgh and Rogers Table 10.3, from
Gregory et al. Oxford Economic Papers, 2001
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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