Arnold Kling  

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Perhaps Cowen and Lemke. Here is my sketch:

Title: Technology Shifts and Unemployment

Abstract:

We present a model in which shifts in technology cause unemployment. There are two types of workers, which we call Type C and Type S. A technology is introduced that is a complement to Type C workers and a substitute for Type S workers. The result is to shift the terms of trade in favor of Type C workers and against Type S workers. For Type S workers, the equilibrium wage falls, and their response is dominated by the substitution effect. It no longer pays for them to work. For type C workers, the equilibrium wage rises, and their response is dominated by the income effect. Rather than increase spending on market goods and services, they increase leisure. Thus, both types of workers are less fully employed than was the case before the technology shift. This episode of high unemployment will end only as the composition of the labor force adapts, with the share of Type S workers declining and the share of Type C workers rising. We apply this model to the Great Depression, when agricultural laborers were the Type S workers and the technology shift was the use of tractors and trucking. We also apply the model to explain the decline in the employment/population ratio since 2000, where workers with skills that can be replicated overseas are the Type S workers and the technology shift is the penetration of the Internet.


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COMMENTS (19 to date)
Adam Ozimek writes:

Arnold,

It seems that immigration and emigration will be very important in terms of how fast period of high unemployment will end in this model. Yet in both Great Recession and Great Depression immigration is held down both by natural causes (negative home equity) and public policy.

If your model were more widely held then maybe economists would recite that "the optimal public policy response to recessions is to encourage immigration" in the same rote way they do with fiscal and monetary policy now.

I'll never understand why the vigorousness with which pundits and economists fought for more monetary (and in some cases fiscal) policy against public perception is lacking in the fight for more immigration. They all say "sure, we need more immigration, but nobody will ever go for it" and then go back to screaming for looser monetary policy or more stimulus.

Maybe your model can fix that.

gnat writes:

"It no longer pays for them [type S workers]to work."
So what do they do?

Arnold Kling writes:

gnat,
The unemployed do a combination of household chores and job searching.

Hugh Watkins writes:

We also apply the model to explain the decline in the employment/population ratio since 2000, where workers with skills that can be replicated overseas are the Type S workers and the technology shift is the penetration of the Internet.

Fair enough, but we are seeing a different type of unemployment now: take Jane a well-educated and tech savvy recruitment consultant. She was working all hours of the day until 2007/2008 when suddenly, out of the blue, no one wanted her services anymore because they simply weren’t recruiting.

Her job didn’t go overseas and technology wasn’t at fault either – it’s just a case of a specialized employee without demand for her speciality.

Jane can choose between waiting for the job market to pick up and re-qualifying for some other job in which her talents are appreciated. Neither choice is especially attractive. She could lower her asking wage, but this may not help her either.

david writes:

Model implies negligible involuntary cyclical unemployment among type C workers.

I will leave you to decide how plausible this is by your standard of "simple behavioral evidence".

fundamentalist writes:

Can anyone do it better than Schumpeter?

Mike writes:

Arnold,

To your list of activities that the unemployed engage in, I would add: Irritate the hell out their spouses.

Student writes:

Has Kling seriously been blogging about "reculation" all this time and seriously never found Aghion and Howitt on a single google search?

Read their "Endogenous Growth Theory" textbook (Chapter 8 on Growth and Cycles specifically). You will see they are already way ahead of you.

Prof. Kling,

Insightful, to say the least. Change is the enemy of equilibrium. Technological change is the most vicious and persistent of all.

The real challenge for a modeler would be to incorporate public choice theories in the mix. The plight of type S labor will be a fertile ground for promises and transfer payments, no?

jb writes:

I see this in an ongoing way with robotics and IT - software and hardware engineers continue to be in high demand, while the low-skilled cashiers, tellers and manufacturing folks are struggling.

However, that only explains a fraction of the change - the collapse in construction was not due to technological change directly (I'm sure some aspect of it was influenced by video/audio conferencing and GoToMeeting). Construction seems to have collapsed because people couldn't afford the status-seeking cost of fancier offices, and decided to make due with what they had.

So I think it's part of the overall explanation for our current situation, but not the only one.

Daublin writes:

Bravo!

Keith Eubanks writes:

Arguments have been made that Kondratieff Cycles, or long waves, are driven by capital turnover: new waves of technology force a turnover in phyical capital every 50 to 80 years.

This view fits nicely with Arnold's argument.

One could argue that during the transition periods, society needs to allocate an increased portion of income toward investment, or at least maintain investment allocations. During both the 1930s and today, private investment (as a portion of national income) declined. In both cases, this decline was driven by policies and actions of the Federal Reserve and Federal Government.

It might be that if the government would stop bleeding the patient, the economy would recover on its own.

Arnold Kling writes:

Student,
I went back and looked at Aghion and Howitt. While they do offer a model with technological change and heterogeneous labor, they are thinking in terms of growth theory and I am thinking in terms of trade theory. The advantage of trade theory, at least to me, is that you keep track of where all the income and production goes. In standard macro, there is "lost output" in a recession. I want to show that the output is not really "lost." For that purpose, I am not enamored of the growth theory framework. Still, it would be appropriate to cite their work, because it does overlap.

Lord writes:

I presume by share you mean number. I too doubt income effects ever dominate and leisure is never really desired; the desire to consume is too strong. But if one posits technological change has made even what they do no longer productive, they may need to halt and figure out something new to do and if they cannot or not as much they may end up idle as well. I think this recession probably had less to do with housing than energy, and higher energy costs simply make much uneconomic. The higher incomes of energy producers may not lead to consumption since they may already be sated and already at full leisure but it still should lead to investment, but it won't no one considers anything worth investing in, This is equivalent to a real shock.

Troy Camplin writes:

I think this would describe very local adjustments in the market, but hardly the Great Depression or the Great Recession. ABCT and Minsky combined seem to do a wonderful job of explaining the Great Recession at the very least. How would housing be affected by internet penetration? One might be able to make an argument for technological change in regards to the tech bubble, but not, I think, for this one. If kept modest, I think this could be a good description of minor cyclic changes, but not of major ones.

fundamentalist writes:

Troy, I agree. The ABCT provides the skeleton, but Minksly, Keynes and the real business cycle all flesh it out. BTW, check out Hayek's "Monetary Theory and Trade Cycles" and you'll see how ancient all of these ideas are.

Wonsil writes:

I was thinking about some recent type S workers who lost their jobs at the expense of previous type S workers. They worked at a local call center that was outsourced to India. They feel the grief of their own job substitution but not of those jobs whom they replaced when the technology eliminated them. Not saying it's easy to do when you're the type S worker but just an observation.

Troy Camplin writes:

David Pryttchko have a good essay in Review of Austrian Economics on combining Minsky and ABCT. Though Minsky is a keynesian, I'm not sure that Keynes really supplies much of benefit, as he seems to contradict ABCT and misunderstand the nature of economic growth (which comes from the creation of new things rather than providing more of the same old things). As for RBCT, while is is true that miscalibration occurs, that just sort of begs the question. What causes it? ABCT tells us. Minsky's "moment" can be used to expand on the things that happen in the economy regarding varieties of investments in response to easy money. But things like aggregates only mask what is really happening. Which is the biggest problem with Keynesianism.

Steve Roth writes:

Thought experiment: imagine that manufacturing and construction productivity increased a thousandfold, very quickly. (Computer-driven nanotech producing anything out of piles of dirt.) One Type C worker with a personal computer can produce what formerly required 100 Type C workers and 900 Type S workers.

Assume (because of limits on human cognitive ability and the IQ bell curve) that half of those Type S workers can never learn to do what Type C worker(s) do(es).

What's the new equilibrium?


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