Arnold Kling  

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Title: Technological Unemployment in a Stock-Adjustment Model

Abstract: Innovation can cause overproduction of consumer durable goods relative to the desired stock. Unemployment can result, until new industries emerge to absorb labor.

Think of the auto industry in the 1920s. Given the price of cars, suppose that the desired stock of cars is one car per household. A car needs to be replaced every three years. If we were in a steady state, then annual production would equal one car for every three households.

However, productivity rapidly improves, reaching an annual rate of one car for every two households with the same labor input. This reduces the price of cars, which raises real incomes and increases the desired stock of cars just a bit. However, it increases purchases of cars by even more, because in the short run people are willing to hold an excess stock of cars, given their high real incomes and the low price of cars.

At some point, though, when people have accumulated too large an excess of cars (there are so many new cars out there that replacement demand is low), they cut back on car purchases, even though they are cheap. Since the car industry already has the capacity to build cars faster than they need to be replaced in a steady state, layoffs take place. Some of the layoffs are temporary (reflecting unusually low demand for replacement vehicles), but most of them are permanent. In fact, assuming that productivity continues to increase, all of the layoffs are permanent.

Full employment will eventually be restored by the expansion of another industry (say, televisions). But for now, the laid off workers have no income, and so they replace their cars at an even slower rate, and they reduce their desired stock of cars.

Beware that this story sounds tighter than it is. I have not done anything about keeping track of the higher real income that comes from the higher productivity. Somebody is richer now than before. Perhaps it is just the factory owners. Or it could also be the fortunate workers who kept their jobs, with higher real wages because of the lower cost of living.

The people with higher income have to do something with it that doesn't create employment for the laid-off auto workers. Otherwise, we don't have an interesting story. Keynesians would have the winners save too much. But I do not think that is necessary. The income gainers could spend their bounty on string quartets (nod to William Baumol) or other goods and services that a former auto worker cannot help to produce. The result will be a big increase in the relative price of string quartets.

Note that Ed Leamer makes a convincing case that cyclical movements in GDP are mostly about housing and consumer durables. This makes stock-adjustment models very important, in my opinion.

I also think that this story means that the measured loss of output in a recession overstates the loss in well-being. At the peak of a cycle, the auto industry is producing more cars than people want, and at the bottom of the cycle people are keeping their older cars going a little longer. The value of the flow of services from cars at the peak is not as high as the government statisticians want to impute to it, and the value of the flow of services from cars at the bottom is not as low as the government statisticians want to impute to it.

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CATEGORIES: Macroeconomics

COMMENTS (10 to date)
jsalvatier writes:

Are string quartet members hoarding cash? If not what are they spending their extra income on?

If you want to explain macro fluctuations, you have to model the complete economy. This is just a partial economy model.

Daublin writes:

Fun stuff!

Maybe you could have new goods like televisions rolling in at some slow rate, one every few years. Laid off people can train up to build something new, but it takes a couple of years to do so.

yes writes:

In order for this model to work cars have to be storable for free, and people have to not expect the low prices to last, otherwise they don't stock up.

Doc Merlin writes:

But high tech workers can also work in lower tier jobs as effectively (or more), so they almost always have a lower unemployment rates than people's who's maximum competency is lower tech.

Lord writes:

I think it underestimates the loss of well being of those workers who had jobs and incomes and no longer do. Some losses are immeasurable.

fundamentalist writes:
Innovation can cause overproduction of consumer durable goods relative to the desired stock.

Only possible if the Fed provides the funding through credit expansion. Savings act as a break on innovation; new technology can only become reality when savings increases enough to provide the necessary funds.

Massive credit expansion by the Fed, as happened throughout the 1920's, causes overproduction in capital goods whether or not there is innovation.

Greg Colvin writes:

I'm with Lord.

After years out of work it's not clear I'll ever be able to work as a computer scientist again, at least not at the top level I used to. I've tried to cover up the hole as a period of independent R&D, but people don't buy it. And they would rather hire a 27 year old than a 57 year old, no matter how stellar my resume and references.

And contra Doc, I'm finding that, given my resume and age, people don't want me in lower tier jobs either. They figure I'll be dissatisfied and will leave as soon as I can, and they are right.

And not only is my career damaged, I'm close to running out of money, and am finding that medicaid and food stamps are not available. So I'll be choosing soon whether to skip some medicines and get sicker, or skip some food and get hungry.

And of course, I am far from alone in this predicament. I'm just grateful I don't still have children depending on me.

So as I said on another thread, this is not my idea of liberty.

Greg Colvin writes:

By the way, the reason I relate personal stories is that I feel that many, perhaps most, economists, fail to consider the human consequences of their ideas.

Thomas Sewell writes:

You might also want to add the recent conversions from high stock levels to just-in-time supply chains.

That has significantly reduced the need to keep stock laying around across almost all industries. Surely that movement would have a similar effect of reducing the demand for workers to produce as much.

Probably more of a long one-time effect, though, rather then a cycle.

Kayze writes:

It is inevitable that our technology advances, innovation in itself is a market. There will always be trade-offs present in each situation. To decrease unemployment, seekers will have to look to other industries. To increase the sales of cars, I think the government would need to instill incentives. With new models fitting the model of cheap, reliable, and gas efficient, I see no reason why owners would not stick to their current fashioned vehicles until they have a real reason to replace them. Is there really no variety? Technology in the assembly lines have definitely destroyed jobs in the manufacturing industry. Why not use a machine? It is cheaper and undoubtedly efficient. This cycle just repeats itself in every industry.

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