Use the classical model to answer this question. Suppose technology improves and
ID: 1092840 • Letter: U
Question
Use the classical model to answer this question. Suppose technology improves and that workers are not the same (as opposed to what we discussed in class). Some are high skilled (like those with a college degree) and some are low skilled (like those with a high school degree). For the high skilled workers the new technology increases their marginal product of labor (because they know how to use the new technology) but for the low skilled workers the new technology does not affect their marginal product of labor. How does the improvement in technology influence the labor market?
Explanation / Answer
The standard measure of aggregate technological change, total factor productivity (TFP), does not
distinguish between the different ways in which technology grows. First, technology growth may
differ across final-output sectors and second, it may have different effects on the productivity of
different input factors. The recent experience of developed countries, however, seems to suggest
that in the past 30 years technological change has originated in particular sectors of the economy
and has favored particular inputs of production.
Arguably, the advent of microelectronics (i.e., microchips and semiconductors) induced a sequence
of innovations in information and communication technologies with two features. First,
sector-specific productivity (SSP) growth substantially increased the productivity of the sector
that produces new capital equipment, making the use of capital in production relatively less expensive.
Second, factor-specific productivity (FSP) growth favored skilled and educated labor
disproportionately. In other words, the recent technological revolution has affected the production
structure in a rather asymmetric way.
Our assessment of the importance of SSP and FSP changes relies heavily on observed movements
in relative prices. For SSP change, we rely on the substantial decline of the price of equipment
capital relative to the price of consumption goods, a process that does not show any sign of slowing
down. On the contrary, it shows an acceleration in recent years. For FSP change, we rely on the
substantial increase in the wage of highly educated workers relative to less educated workers, the
skill premium.
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