Abstract:
We develop a two-sector model in which technological progress alternatively raises the productivity of one sector after another. We assume that goods are complements for the final consumers. The sector which benefits from technical progress will see a resulting fall in its price. In this model, any uneven technical progress leads to job destruction in the sector which benefits from it, and job creation in the least productive sector. We examine the pattern of wages and unemployment that follow shocks (symmetric or asymmetric) which can occur in the economy. We show that wages will immediately rise and overshoot their long-run target: as time passes they must fall, as will the degree of tightness in the labour market (and sometimes unemployment). An `age of diminished expectations' following any productivity shock is then likely to occur sooner or later.
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