Factor-Biased Technological Change

15 June 2009 at 11:39 am 5 comments

| Dick Langlois |

Back in October, I blogged about Daron Acemoglu’s presentation at the Economic History Association meeting. There now seems to be an NBER working paper version of that talk, called “When Does Labor Scarcity Encourage Innovation?” Here is the abstract.

This paper studies the conditions under which the scarcity of a factor (in particular, labor) encourages technological progress and technology adoption. In standard endogenous growth models, which feature a strong scale effect, an increase in the supply of labor encourages technological progress. In contrast, the famous Habakkuk hypothesis in economic history claims that technological progress was more rapid in 19th-century United States than in Britain because of labor scarcity in the former country. Similar ideas are often suggested as possible reasons for why high wages might have encouraged rapid adoption of certain technologies in continental Europe over the past several decades, and as a potential reason for why environmental regulations can spur more rapid innovation. I present a general framework for the analysis of these questions. I define technology as strongly labor saving if the aggregate production function of the economy exhibits decreasing differences in the appropriate index of technology, theta, and labor. Conversely, technology is strongly labor complementary if the production function exhibits increasing differences in theta and labor. The main result of the paper shows that labor scarcity will encourage technological advances if technology is strongly labor saving. In contrast, labor scarcity will discourage technological advances if technology is strongly labor complementary. I provide examples of environments in which technology can be strongly labor saving and also show that such a result is not possible in certain canonical macroeconomic models. These results clarify the conditions under which labor scarcity and high wages encourage technological advances and the reason why such results were obtained or conjectured in certain settings, but do not always apply in many models used in the growth literature.

Entry filed under: - Langlois -, Innovation, Papers.

Peter L. Bernstein (1919-2009) Campello and Fluck

5 Comments Add your own

  • […] question bête (?!) du soir Via Organizations and Markets, voici l’abstract d’un récent article de l’économiste futur nobélisable Daron […]

  • 2. Henrik Berglund  |  15 June 2009 at 3:17 pm

    Just reading the abstract made me think of the solidaristic wage policies developed by Swedish trade unionists and social democrats Gösta Rehn and Rudolf Meidner in the late 1940s. Their goal was to combine full employment with equality in pay, while keeping inflation at bay and, importantly, ensuring that national economy as a whole remained competitive.

    Without going into too much detail, equality in pay was critical to ensuring national competitiveness. The solidaristic wage policy – which based wage increases on average productivity growth-figures – would force inefficient labor intensive industries to rationalize or die. Combined with an active labor market policy, this quickly moved labor into more efficient industries (arguably even faster than the free market could), thus increasing the overall productivity of the economy.

    Of course, there was also the fear that successful firms would make extraordinarily large profits, which in turn led to the much despised Wage Earner Funds…

  • 3. spostrel  |  15 June 2009 at 7:08 pm

    The problem with all such theories is that they assume that the technological possibilites are limited to the specific type under study. It seems more likely that factor prices and regulations affect the direction of technical progress more than they do the level. Another way of putting this is that a main opportunity cost of a particular form of technological development is the foregone trajectories in other directions. For example, when all the chemists at a plastics plant are absorbed in meeting environmental regulations, new product development is likely to be slower.

  • 4. REW  |  15 June 2009 at 8:02 pm

    I’d like to point out some work on induced technical change that has been around for a quarter-century, based on microeconomic models of factor markets. Just a short while before his death in 2008 at the age of 84, Vernon Ruttan produced “Induced Technical Change, Induced Institutional Change and Mechanism Design”, which places his work in the field (along with Acemoglu’s), beginning with his landmark work with Hayami. See http://www.apec.umn.edu/documents/RuttanT&DSemSp08.pdf

  • 5. Joseph Mahoney  |  16 June 2009 at 4:31 am

    Informative posting and insightful comments: much appreciated.

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