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When Does Labor Scarcity Encourage Innovation?

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  • Daron Acemoglu

Abstract

This paper studies the conditions under which the scarcity of a factor (in particular, labor) encourages technological progress and technology adoption. In standard endogenous growth models, which feature a strong scale effect, an increase in the supply of labor encourages technological progress. In contrast, the famous Habakkuk hypothesis in economic history claims that technological progress was more rapid in 19th-century United States than in Britain because of labor scarcity in the former country. Similar ideas are often suggested as possible reasons for why high wages might have encouraged rapid adoption of certain technologies in continental Europe over the past several decades, and as a potential reason for why environmental regulations can spur more rapid innovation. I present a general framework for the analysis of these questions. I define technology as strongly labor saving if the aggregate production function of the economy exhibits decreasing differences in the appropriate index of technology, theta, and labor. Conversely, technology is strongly labor complementary if the production function exhibits increasing differences in theta and labor. The main result of the paper shows that labor scarcity will encourage technological advances if technology is strongly labor saving. In contrast, labor scarcity will discourage technological advances if technology is strongly labor complementary. I provide examples of environments in which technology can be strongly labor saving and also show that such a result is not possible in certain canonical macroeconomic models. These results clarify the conditions under which labor scarcity and high wages encourage technological advances and the reason why such results were obtained or conjectured in certain settings, but do not always apply in many models used in the growth literature.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14809.

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Date of creation: Mar 2009
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Publication status: published as Daron Acemoglu, 2010. "When Does Labor Scarcity Encourage Innovation?," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1037 - 1078.
Handle: RePEc:nbr:nberwo:14809

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  1. Acemoglu, Daron & Zilibotti, Fabrizio, 2000. "Productivity Differences," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2498, C.E.P.R. Discussion Papers.
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  3. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(1), pages 41-63, February.
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  7. Richard G. Newell & Adam B. Jaffe & Robert N. Stavins, 1999. "The Induced Innovation Hypothesis And Energy-Saving Technological Change," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 941-975, August.
  8. Acemoglu, Daron, 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1707, C.E.P.R. Discussion Papers.
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  14. Ethan Lewis, 2005. "Immigration, Skill Mix, and the Choice of Technique," Working Papers 05-04, Center for Economic Studies, U.S. Census Bureau.
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  16. Zeira, Joseph, 1995. "Workers, Machines and Economic Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1139, C.E.P.R. Discussion Papers.
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  20. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier, Elsevier.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Factor-Biased Technological Change
    by rlanglois in Organizations and Markets on 2009-06-15 16:39:49
  2. Cheap Labor and the Great Stagnation
    by Peter Frase in peter frase on 2011-07-27 19:51:52
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