Productivity shocks and the unemployment rate

Productivity grew noticeably faster than usual in the late 1990s, while the unemployment rate fell to levels not seen for more than three decades. This inverse relationship between the two variables also can be seen on several other occasions in the postwar period and leads one to wonder whether there is a causal link between them. This paper focuses on technological change as the common factor, first reviewing some recent research on the effect of technological change on the unemployment rate and then presenting some empirical evidence on the issue. While theoretical models make conflicting predictions about the effects of a technology shock on the unemployment rate, the empirical evidence presented here shows that a positive technology shock leads to a reduction in the unemployment rate that persists for several years.