Technology choice: the output and employment tradeoff.

Introduction

Formulation of policies designed to maximize output and facilitate growth has again become a subject of both practical and academic urgency. Much of the literature is rooted in the Harrod-Domar type growth model as explicated by Solow [8]. The basic model incorporates technological improvements in the production function in the form of augmented labor. Better technology improves the effectiveness of the labor supply.

It shifts the production function, raising output faster than population and labor supply growth, and thereby, increases per capita output. The model assumes that labor is homogeneous, adapting to the technologically altered capital, and that the labor force is fully employed. In such growth models, capital adequacy is key; and the economy adjusts to a long run equilibrium growth path, only temporarily dislodged by technological innovation. The short run disruptions associated with the adjustment process are not addressed.

The new growth theory, associated with Paul Romer [7] and Robert E. Lucas [6], treats capital and technology, as well as labor, as endogenous. Technology is incorporated into the production function, embodied in additional capital. If there are constant returns to scale the growth rate is determined by the rate of saving and, therefore, of capital formation.

This new generation of endogenous growth theory explicitly treats the process by which variables interact as they are added and combined in the growth of production, examining more intensely the roles of learning, human capital, R&D, and externalizes. But, while recognizing the existence and seriousness of structural dislocation associated with growth, endogenous growth models do not directly address the issue of labor-capital mismatch because they assume a certain level of adaptation to the new technology.

However, there is, increasingly, a literature directed to the impact of the mechanism of economic growth - capital formation, labor supply growth, and especially technology - on structural change and employment consequences.

Abramovitz and David recognized that in contrast to the smooth equilibrium path assumed by the Harrod-Domar type growth theories, "general economic growth as we have known it is not a balanced growth . . . . [T]he historical process of growth . . . may best be viewed as part of a sequence of technologically induced traverses, disequilibrium transitions between successive growth paths."

Adolph Lowe developed "traverse analysis" to describe how technological innovation dislodges the economy from its long run equilibrium growth path, causing short run structural dislocations and unemployment. Lowe recognized that there are rigidities in "capital structures and the work in process flows" and the "given stock of human capabilities".

New technology, embodied in capital stock additions, requires the economy to "traverse" from one growth path to another, disrupting the complementary structural relationship between capital and labor. Lowe's solution is additional savings and capital formation to provide the machines and employment for the consumption goods sector for workers displaced by labor saving technological innovation.

The economy then traverses to a new production function and equilibrium growth path, one soon to be disrupted by further technology. Thus traverse analysis explicitly examines the crucial mismatch between the amount of labor needed for the capital goods of the new production function and the labor supply available.

However, traverse analysis treats labor as undifferentiated and, consequently, ignores the serious problem of structural unemployment that results when changes in the production function require labor force capacities unavailable from the given stock of labor supply.