Summary of WP/94/111: “Technological Change, Relative Wages, and Unemployment”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Well-documented features of the labor market in several industrial countries in the 1980s have been a fall in the relative wage of unskilled workers and a relative increase in employment of highly educated workers. The existing evidence suggests that, at least for the United States, both phenomena may have been caused by skilled-biased technological progress.

The paper examines analytically the effect of this type of technological shock on the structure of wages, the composition of employment, and the level of unemployment. It develops a dual labor market model that incorporates efficiency wages, worker heterogeneity, minimum wage legislation, and unemployment benefits. The first part of the paper shows that, in such a setting, a wage differential emerges in equilibrium as a result of efficiency wage considerations in the primary sector. Equilibria with full employment or unemployment of skilled workers are shown to be possible outcomes, depending on the perceived disutility of effort and the structure of unemployment benefits.

The second part of the paper shows that a technological shock that reduces the use of unskilled labor while raising the use of skilled workers always reduces the demand for unskilled labor in the primary sector. In contrast, the net effect on the demand for skilled labor reflects two conflicting factors: a direct technological effect, which is positive; and an indirect effect, which is negative and operates through changes in the efficiency wage paid to skilled workers. If efficiency considerations play a limited role, the technological shock has no effect on wages or on total employment in the primary sector; employment of skilled workers rises by the same magnitude as the fall in employment of unskilled workers. When efficiency considerations are moderately important, the adoption of the new technology raises the relative wage of skilled workers, reduces aggregate employment as well as the employment level of unskilled labor in the primary sector, and will in general raise the employment level of skilled workers. However, if efficiency considerations are very important in the primary sector, the indirect effect of the technological shock may completely offset the direct, positive effect, and the level of employment of skilled workers may remain unchanged. Thus, the effect of technological shocks on the employment level of skilled workers depends crucially on the strength of efficiency considerations in the primary sector.

The analysis also shows that the technological shock can move the economy from an initial equilibrium in which there is no unemployment to a situation where skilled workers who are unable to obtain a job in the primary sector may choose to remain unemployed rather than seek employment in the secondary sector. To offset this adverse effect, policymakers may need to reduce unemployment benefits to restore the incentive to work.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund