Working Paper: CEPR ID: DP979
Authors: Daniel Cohen; Gilles Saint-Paul
Abstract: We develop a two-sector model in which technological progress alternatively raises the productivity of one sector after another. We assume that goods are complements for the final consumers. The sector which benefits from technical progress will see a resulting fall in its price. In this model, any uneven technical progress leads to job destruction in the sector which benefits from it, and job creation in the least productive sector. We examine the pattern of wages and unemployment that follow shocks (symmetric or asymmetric) which can occur in the economy. We show that wages will immediately rise and overshoot their long-run target: as time passes they must fall, as will the degree of tightness in the labour market (and sometimes unemployment). An `age of diminished expectations' following any productivity shock is then likely to occur sooner or later.
Keywords: unemployment; technical progress; diminished expectations
JEL Codes: E2; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uneven technical progress (O49) | Job destruction in the productive sector (O14) |
| Uneven technical progress (O49) | Job creation in the less productive sector (O49) |
| Technical progress (O49) | Fall in prices in the productive sector (E31) |
| Fall in prices in the productive sector (E31) | Layoffs in that sector (J63) |
| Productivity shock (O49) | Initial rise in wages (J31) |
| Initial rise in wages (J31) | Overshoot long-run targets (E61) |
| Time passes (Y60) | Decrease in incentive to reallocate labor (J29) |
| Decrease in incentive to reallocate labor (J29) | Lower wages (J31) |
| Job destruction in the productive sector (O14) | Initial rise in unemployment (J64) |
| Job creation in the less productive sector (O49) | Counter unemployment (J64) |