Technology choice: the output and employment tradeoff

American Journal of Economics and Sociology, The,  Jan, 1998  by Kalman Goldberg,  Jannett Highfill,  Michael McAsey

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The traditional Keynesian problem is a short run concern about whether the required full employment amount of investment will be forthcoming; the traditional growth theories assume that in the long run the amount of investment will equal the saving rate and will embody the highest level of technological improvements forthcoming. Ignored is the type of investment, that is, the technology level embodied in the investment. And this consideration poses a policy dilemma for economies. Investment in additional capital stock can be made in the highest level of technology available with the objective of maximizing output and future growth potential. In Solow's terms, the additional labor supply of a given year can be provided with a sufficient amount of capital of the highest order, altering the production function by raising effective labor and productivity. However, we argue that there is no assurance that the right types of labor skills will, in fact, be available in the correct amounts to complement the new capital. If they are not, unskilled workers will be unemployed although output is maximized, given the best technology available.

An alternative choice is to invest in capital goods that do not require as much skilled labor, adjusting the production function to the skill characteristics of the labor force, ensuring full employment, but at the cost of a lower level of output. The recognition that there is no automatic match between labor force endowments and capital stock needs at different technology levels identifies one of the most troubling contemporary structural unemployment problems in both highly industrialized and developing countries.

Briefly, this paper will show that investment in capital goods of the highest available technology maximizes the potential increase in output, but may also create unemployment of unskilled workers; alternatively, investment in capital goods embodying a lower technology level will result in a lower increase in output, will reduce or eliminate unemployment of unskilled workers, but may create underemployment of skilled labor. The economy faces a tradeoff between maximizing output or employment. We shall also show that the way out of this dilemma is to ensure - through investment in human capital - the labor force mix is adjusted to the skill needs of a production function embodying the highest technology. The paper will proceed by setting out the basic model in the first section, and then explain the technology choice decision in the second section. The last section suggests a policy approach to resolve the dilemma.

The following assumptions are made:

1. A static model is assumed. It is supposed however, that at the moment being modeled, increases in population and labor force generate new workers, who are endowed with skilled and unskilled characteristics. (There exist "old" workers in the economy and a stock of capital appropriate to their skill levels; it is assumed they have already been assigned to a job.) One of the tasks of the economy is to absorb these new workers into jobs.