2019

TECHNOLOGICAL PROGRESS: DOES IT REALLY LEAD TO HIGHER UNEMPLOYMENT?

(AN EVIDENCE FROM MAJOR OECD COUNTRIES)

NARBADESHWAR MISHRA
PhD1905
INTRODUCTION

Hitherto, there had been numerous dialogues round the nexus between labour productivity growth
and unemployment rate in third world/developing and developed nations. Government organizations,
economists and policy makers have debated if labour productivity growth stemming from technical
progress can augment unemployment? However, most economists point that long run technical
progress and growth has directed to a rising standard of living in developed economies. On the
contrary, the understanding is that technical progress and labour productivity growth have paid, if not
significant, to unemployment which has been much more controversial especially in the developing
countries.

The debate had found its source from the empirical study of Okuns (1962) which bolstered on the
node of labour productivity and employment. The study exposed that if there is any linkage between
employments and output then, there is the propensity that such rapport may change over time
because of changing rate of growth of labour productivity.

Hence this current study focuses on the link between unemployment and labour productivity growth
via time with reference to OECD countries.

LITERATURE REVIEW

Although unemployment rate in any country is a function of population growth, demographic shifts,
varying labour market participation and so on as given below. Yet one might want to invalidly
presume that the demand side of labour, employment offered by firms among others is the most
driving force of unemployment rate.

Ut = f (Gt , d , ∆l, Ω)

Where:
Ut = Unemployment rate
Gt = Population growth
D = Demographic shifts
∆l = Varying labour market participation
Ω = Other factors

As per the theory, advent of new technology is likely to reduce labour thereby adding to the problem
of unemployment. On the other hand, it could be isolated that the arrival of new technology in the
long run, which in turn replaces labour increases labour productivity thereby making firms and the
economy at large to be more competitive. However, there is the likelihood that the foregoing may
reduce unemployment and thus increase employment.

For instance, Basu et. al.,(2006) and others, finds that there is a negative correlation of employment
and labour productivity growth on employment via hours worked. Tobin (1993) stipulated that there
is a short run technology shocks which may induce a negative effect on employment.
It is undeniable fact that higher labour productivity growth has the potentials to get assistants from
structural change. This is because old jobs are destroyed and replaced by new ones. Hence, this is
also referred as the “creative destruction effect”

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DATA SECTION

1. Data and Sources

This study used annual data to examine the nexus between unemployment rate and labour
productivity in major OECD countries between 2000 and 2018. Yearly data on labour productivity
(y) and unemployment are collected from the databank of world bank and OECD databank. Also,
yearly data on unemployment (u) rate is collected from the International labour organisations (ILO).

2. Variable Measurement

GDP per hour worked is a measure of labour productivity. It measures how efficiently labour input is
combined with other factors of production and used in the production process. Labour input is
defined as total hours worked of all persons engaged in production. Labour productivity only
partially reflects the labour productivity of labour in terms of the personal capacities of workers or
the intensity of their effort. The ratio between the output measure and the labour input depends to a
large degree on the presence and/or use of other inputs (e.g. capital, intermediate inputs, technical,
organisational and efficiency change, economies of scale). This indicator is measured in USD
(constant prices 2010 and PPPs) and indices. Unemployment is measured yearly from ILO.

To calculate labour productivity, we have taken (PPP-adjusted) GDP per employed worker,
available from World Development Indicators which is gathered by the International Labour
Organization. Then we have divided that number by hours worked per employed worker, data taken
by the OECD for member countries.

3. Method of Analysis

To examine the relationship between unemployment rate and productivity growth in major OECD
countries, we have made a simple linear regression model and trying to capture the impact of the
unemployment on labour productivity.

Labour productivity = β1 + β2Unemployment + ε

4. Analysis
As shown in figure 1(using tableau), the labour productivity of major OECD countries has been
rising over the period since 2000 which we can associate with the improvement and advancement of
the technology used by these countries and thereby increasing the labour productivity significantly.

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Figure 1

Similarly figure 2 summarizes the pattern of labour productivity over time since 2000 and
unemployment in the same time period. It is very evident that both the parameters have increased
since 2000 which is contradictory to the theory. If we see the case of south Africa – the
unemployment is relatively very high than as compared to other OECD countries reasons for which
is not only the technological but policy paralysis of the South African govt, huge mounted public
debt and so no productive spending of the borrowing.

In figure 3 shown above, there is an upward trend between labour productivity and unemployment
since 2000. It can also be seen that shows the upward trend between the said variable which again is
something that doesn’t support the theory hitherto. Although many economists have claimed that the
positive relation between the labour productivity and the unemployment is loose and least significant
as we have found in our regression test.

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 Figure 2

Figure 3

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Though from table 1, we can say that there is a positive correlation between the variable under study
to the extent of 20% but we can say that the exogeneous variable ( unemployment) has no significant
impact on the endogenous variable (labour productivity) – because the p value in table 2 is not at all
significant.

Table 1
Regression Statistics
Multiple R 0.196897976
R Square 0.038768813
Adjusted R Square -0.021308136
Standard Error 6.049783732
Observations 18

Table 2
Coefficients Standard Error t Stat P-value
Intercept 88.35721482 11.76647296 7.509235359 1.24828E-06
Unemployment 1.35662092 1.688772674 0.803317664 0.433563649

CONCLUSION

So, we can say that though there is a short run technology shocks which may induce a negative
impact on employment. The arrival of new technology in the long run, which in turn replaces labour
increases labour productivity thereby making firms and the economy at large to be more competitive,
thereby may reduce unemployment and thus increase employment.

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