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Labor‐eliminating technical change in a developing economy
Author(s) -
Gilbert John,
Oladi Reza
Publication year - 2021
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12263
Subject(s) - economics , technical change , unemployment , context (archaeology) , incentive , wage , distortion (music) , labour economics , technological change , technical progress , developing country , efficiency wage , general equilibrium theory , microeconomics , industrial organization , macroeconomics , productivity , computer science , paleontology , amplifier , computer network , bandwidth (computing) , biology , economic growth
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.