South-Western College Publishing - Economics  

Policy Debate: Do technological advances result in higher unemployment?

Issues and Background

An increase in the pace of technological change can have two profound side effects in the labor market. It can increase the rate and the average duration of unemployment. Because firms may not consider it cost-effective to retrain some types of workers to keep up with change, notably the less-educated and older employees, these workers may be jobless for long periods of time, with some of them perhaps never working again. If technological change causes workers to become unemployed more often and for longer periods of time, not only will the level of unemployment increase, but the "natural rate of unemployment," the hypothesized minimum sustainable rate of unemployment, will increase as well.
~William J. Baumol and Edward N. Wolff, "Side Effects of Progress," Public Policy Brief, July 1998
Technology both eliminates jobs and creates jobs. Generally it destroys lower wage, lower productivity jobs, while it creates jobs that are more productive, high-skill and better paid. Historically, the income-generating effects of new technologies have proved more powerful than the labour-displacing effects: technological progress has been accompanied not only by higher output and productivity, but also by higher overall employment.
~OECD Jobs Study, 1994

Technological advances allow society to produce more output from the existing mix of resources. These advances may take the form of less costly methods of producing existing output or may result in the production of new (or substantially improved) commodities (such as DVD players, HDTV, anti-lock braking systems, and similar innovations). Society clearly gains from the production of either more output or more highly valued output. But, how do these technological advances affect employment?

Virtually all types of technological change result in increases in the demand for labor in some labor markets and decreases in the demand for labor in other labor markets. The introduction of assembly line production methods and the production of interchangeable parts resulted in a substantial increase in labor productivity. This technological innovation also resulted in an increase in the demand for unskilled workers and a decrease in the demand for skilled artisans. The introduction of automated manufacturing processes, on the other hand, has resulted in a decrease in the demand for unskilled workers and an increase in the demand for quality control technicians and computer programmers. In general, technological change will alter the composition of the demand for labor, raising the demand for some types of labor and reducing the demand for other types of labor. Those who lose jobs as a result of technological change that reduces the demand for that category of labor are said to be structurally unemployed.

Even though technological change may adversely effect the demand for labor in some labor markets, the overall effect of technological change on total employment may be positive. Technological change tends to increase the rate of economic growth. Higher rates of economic growth are generally associated with lower unemployment rates. This relationship between changes in the rate of economic growth and the change in the unemployment rate is summarized by "Okun's law," a relationship that indicates that a 1% increase in the rate of economic growth lowers the unemployment rate by 0.3%. While there is some doubt about the exact magnitude of this effect, there is substantial empirical evidence that unemployment rates tend to fall when the rate of economic growth is higher.

While the effect of technological change on the unemployment rate is ambiguous, this may be little consolation to those workers whose job skills have been rendered obsolete as a result of technological change. One of the issues that every industrialized society has to deal with is the extent to which the government should be involved in the retraining of structurally unemployed workers.

A good deal of recent debate has involved the related question of whether the widespread use of computers in the workplace has enhanced productivity. Preliminary studies suggested that the introduction of computers had no significant effect on productivity. More recent studies have generated mixed results. It is fairly clear, though, that the widespread introduction of computers has, to date, had a less dramatic effect on productivity and economic growth than resulted from the widespread introduction of such earlier innovations as the steam engine, electricity, and the internal combustion engine.


Primary Resources and Data

  • Bureau of Labor Statistics
    The Bureau of Labor Statistics is the best source for data on current labor market conditions. site contains a wide variety of statistics and data, online working papers dealing with the labor market, and information about the programs and publications of this agency.

  • Bureau of Labor Statistics, "Occupational Outlook Handbook"
    The Occupational Outlook Handbook is a superb source for information about current and expected future labor market conditions for a wide variety of occupations. For each occupational title, this handbook provides information about the type of work involved, training and educational requirements, and salary information. Projections of future labor market conditions (based upon survey responses) are also included for each occupation.

  • Bureau of Labor Statistics, "The 10 occupations with the largest job growth, 2004-14"
    This table provides a breakdown of the expected number of job openings by level of education and training requirements. As this table indicates, much of the projected job growth is in occupations that have relatively limited education requirements.

  • Monthly Labor Review
    The online edition of Monthly Labor Review contains current labor force statistics and studies of trends in labor markets. This is a good place to search for recent studies of the effect of technological change on the labor market.

  • Bureau of Labor Statistics, "How the Government Measures Unemployment"
    This online document contains a detailed description of the process by which the government constructs unemployment statistics.

  • Bureau of Labor Statistics, "The Employment Situation"
    This document contains the most recent release of statistics on the state of the U.S. labor market. A detailed breakdown of labor force, employment, and unemployment statistics is provided by age, educational attainment, race, gender, and industry.

  • F.M. Scherer, "Raising Productivity on the Technological Frontier"
    In this online article, F.M. Scherer provides a detailed discussion of the factors that result in productivity growth. He describes some of the major problems in measuring the benefits from quality improvements or the introduction of new products.

  • National Center for Policy Analysis, "Productivity"
    This page contains links to information and short essays dealing with labor productivity in the U.S. economy. It is noted that recent increases in labor productivity may be the result of the introduction of computers in the workplace.

  • Workforce Investment Act of 1998
    This is the text of the statute that establishes the Workforce Investment Act, a program designed to provide job skills to workers who are structurally unemployed. This program was created in 1998 and implemented in 2000 as a replacement for the Job Training and Partnership Act (which in turn, was a replacement for CETA, the Comprehensive Training and Employment Act).


Different Perspectives in the Debate

  • William J. Baumol and Edward N. Wolff, "Side Effects of Progress"
    William J. Baumol and Edward N. Wolff address the issue of structural unemployment that results from a more rapid pace of technological progress in article appearing in the July 1998 issue of Public Policy Brief. They note that a higher rate of technological change generally results in higher rates of structural unemployment, particularly for workers who are approaching retirement age and workers possessing low levels of educational attainment. Baumol and Wolff suggest that the government should devote more resources to retraining workers. (To view this document, the Adobe Acrobat viewer plugin is required. You may download this viewer by clicking here.)

  • OECD, "The OECD Jobs Study: Facts, Analysis, Strategies"
    The OECD examines alternative strategies associated with expanding employment in this online article and argues that technological change tends to create more jobs than are lost. Economies, however, have to deal with the problem of structural unemployment that results from technological change. The tradeoff that economies face between job security and economic growth is also discussed in this article.

  • J. Bradford DeLong, "How Fast is Modern Economic Growth"
    In this online article, J. Bradford De Long argues that conventional measures of economic growth underestimate the actual benefits that have resulted from technological advances. In particular, he notes that calculations of economic growth do not fully take into account the availability of new products that have resulted from technological advances.

  • W. Michael Cox and Richard Alm, "Time Well Spent: The Declining Real Cost of Living in America"
    In this 1997 Dallas Fed annual report, W. Michael Cox and Richard Alm examine how increases in labor productivity have lowered the real cost of most commodities. In this report, they measure the real cost in terms of the number of hours of labor required for a typical manufacturing worker to pay for each of the commodities discussed. This report emphasizes the importance of technological innovation in raising the standard of living of a typical worker. (Note: This article follows a brief letter from the President of the Dallas Fed.)

  • Federal Reserve Bank of Minneapolis, "Labor Productivity is the Key to Economic Growth"
    The relationship between labor productivity and economic growth is analyzed in this 1996 Minneapolis Fed annual report. The report argues that the major source of economic growth is the increase in productivity that results from technological advances.

  • Stephen D. Oliner and Daniel E. Sichel , "The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?"
    In this March 2000 Federal Reserve Board working paper, Stephen D. Oliner and Daniel E. Sichel examine the determinants of productivity growth in recent years. They find that the use of information technology appears to be an important reason behind the growth in productivity in the latter part of the 1990s. Technological advances in computer technology seem to have accelerated this growth. (While portions of this paper are relatively technical, introductory economic students should still be able to understand the essential arguments.)

  • Office of the Chief Economist, U.S. Department of Labor, "Generating Productivity Growth: A Review of the Role of Workplace Practices and Computers"
    In this September 10, 1996 report, the Department of Labor summarizes the results of recent studies concerning the effect of computers and workplace practices on productivity. The report notes that the evidence suggests that there are substantial productivity gains resulting from additional worker educational attainment, offsite training programs, and computer training. Studies of individual firms find a substantial return to computer use in the workplace. The report also indicates that a recent study by Alan Krueger has found that workers who use computers in their jobs receive 15% higher pay than similar workers who do not use computers.

  • Sheila McConnell, "The Role of Computers in Reshaping the Labor Force"
    In this August 1996 Monthly Labor Review article, Sheila McConnell examines the impact of computing technology in the workplace. She notes that, unlike most past technological innovations, the introduction of computers has affected virtually every occupation. (To view this document, the Adobe Acrobat viewer plugin is required. You may download this viewer by clicking here.)

  • Laura Freeman, "Job Creation and the Emerging Home Computer Market"
    Laura Freeman discusses the job creation that has resulted from the growth of the home computer market in the August 1996 issue of Monthly Labor Review. She observes that growth in consumer demand for personal computers has had a substantial impact on employment in wholesale and retail companies, software firms, and information retrieval firms. (To view this document, the Adobe Acrobat viewer plugin is required. You may download this viewer by clicking here.)

  • Allen J. Scott, "Multimedia and Digital Visual Effects: an Emerging Local Labor Market"
    In this March 1998 issue of Monthly Labor Review, Allen J. Scott examines the local labor market in multimedia and digital visual effects that has recently developed in southern California. This is an example of a labor market that was created as a result of technological advances. (To view this document, the Adobe Acrobat viewer plugin is required. You may download this viewer by clicking here.)

  • William C. Goodman, "The Software and Engineering Industries: Threatened by Technological Change?"
    In this article appearing in the August 1996 issue of Monthly Labor Review, William C. Goodman notes that declines in defense spending and more efficient automated software design processes have resulted in declines in the rate of growth in employment in the engineering and software industries. (To view this document, the Adobe Acrobat viewer plugin is required. You may download this viewer by clicking here.)

  • Alan Greenspan, "Structural Change in the New Economy"
    Federal Reserve Board Chair Alan Greenspan discusses the impact of technological change in this July 11, 2000 speech. He argues that rapid technological change has resulted in high rates of economic growth, low inflation, and low levels of unemployment.

  • 2003 Annual Report Federal Reserve Bank of Dallas, "Riding a Surge of Technology"
    In this Annual report, the Federal reserve Bank of Dallas suggests that rapid productivity growth has been caused by the successful integration of computer networks into businesses. This has resulted in declining unemployment and relatively rapid economic growth.

  • Federal Reserve Governor Susan Schmidt Bies, "Remarks Before the Tech Council of Maryland's Financial Executive Forum, Bethesda, Maryland "
    Susan Schmidt Bies, in this January 18, 2006 speech, argues that productivity growth has been fueld by technological change in information technology and biotechnology. This has spurred economic growth and reduced unemployment.

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