Technology_change,_productivity_growth,_and_unemployment

Olivier Blanchard *
April 1998
The fourth factor often mentioned in discussions of European unemployment is
the slowdown in productivity growth that has affected nearly all OECD countries
since the mid- 1970s.
Constructing total factor productivity growth numbers free of the effects of business
cycle variations is, as the large recent literature on the topic has shown, a difficult
exercise. But the trend evolutions are clear. In most countries, TFP growth
has been lower-often much lower-than it was before the mid-1970s. And the
decrease in the underlying TFP growth rate appears to have been quite abrupt,
taking place largely during the second half of the 1970s. Given that this period
also corresponds to the start of the rise in unemployment, it is tempting to see
a causal link from productivity growth to unemployment. Furthermore, the decline
has typically been larger in Europe than in the United States; this may help
explain why the increase in unemployment has been larger in Europe.
The purpose of this note is to explore this argument, and more generally explore
the relation between productivity growth and unemployment. I focus on two issues.
(1) The relation between technological change and unemployment.
To the extent that behind productivity growth is a process of technological
change, a process of creation and destruction, the type of model we have developed
suggests that productivity growth is likely to affect unemployment. Different
rates of productivity growth are likely to be associated with different rates of job
flows, different paths of profit for firms, different bargaining outcomes between
workers and firms as existing jobs become economically obsolete.
Can this line of argument help explain the rise in European unemployment? Not
easily:
Theoretically, the sign is typically wrong: to the extent that a decline in productivity
growth comes with a lower rate of technological change, lower job creation/
destruction, and to decrease unemployment than to increase it.