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Labor‐eliminating technical change in a developing economy

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  • John Gilbert
  • Reza Oladi

Abstract

Developing countries face significant challenges arising from automation. While the trade theory literature has tended to focus on factor‐neutral and factor‐augmenting technical change, automation processes suggest another form of technical change is relevant: factor‐eliminating. We explore the impact of a labor‐eliminating technical change in the context of a small developing economy. Unlike labor‐augmenting technical changes, labor‐eliminating technical changes are not necessarily cost‐reducing, and thus will not necessarily be adopted. A manufacturing wage held artificially higher than at the market‐clearing level, as in the Harris–Todaro framework, increases the incentive to automate. We establish the conditions under which firms will adopt a labor‐eliminating technology, and describe the resulting changes in equilibrium outcomes. Under plausible circumstances, automation can actually lower output, and may raise both the rate and level of unemployment. Immiserizing growth becomes a possibility, and can be tied directly to the underlying wage distortion.

Suggested Citation

  • John Gilbert & Reza Oladi, 2021. "Labor‐eliminating technical change in a developing economy," International Journal of Economic Theory, The International Society for Economic Theory, vol. 17(1), pages 88-100, March.
    • Handle: RePEc:bla:ijethy:v:17:y:2021:i:1:p:88-100
    DOI: 10.1111/ijet.12263
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    References listed on IDEAS

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    Cited by:

    1. John Gilbert & Onur A. Koska & Reza Oladi, 2022. "Labor‐eliminating technology, wage inequality, and trade protectionism," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1249-1265, December.
    2. João Ricardo Faria & Franklin G. Mixon, 2022. "Labor Markets and Sustainability: Short-Run Dynamics and Long-Run Equilibrium," Sustainability, MDPI, vol. 14(7), pages 1-10, April.

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