Question

If technological change increases structural unemployment, why do most governments and economists encourage such change? Prepare a 2-page paper on this topic. Cite references to material that you use in preparing the essay.

Answer 1

It shall be noted that technological unemployment is the loss of jobs caused by technological change. It is a key type of structural unemployment.

Thus, there is no doubt that technological change increases structural unemployment. But most governments and economists encourage such change because, according to them, technological advancement is the key to high economic growth and on an overall basis, such technological advancements does not have any permanent negative impact on the jobs.

The structural unemployment that results because of it would get corrected with re-training and hence, is considered short-lived.

Prior to the 18th century, both the elite and common people would generally take the pessimistic view on technological unemployment. In the 18th century fears over the impact of machinery on jobs intensified with the growth of mass unemployment, especially in Great Britain which was then at the forefront of the Industrial Revolution.

Yet some economic thinkers began to argue against these fears, claiming that overall innovation would not have negative effects on jobs. These arguments were formalized in the early 19th century by the classical economists. During the second half of the 19th century, it became increasingly apparent that technological progress was benefiting all sections of society, including the working class. Concerns over the negative impact of innovation diminished. The term "Luddite fallacy" was coined to describe the thinking that innovation would have lasting harmful effects on employment.

Technological advancement has huge potential to create new jobs and set up new firms and give birth to new industries, and thus has the potential to widen the base for employment generation.

According to the compensation theory, there are labor-friendly consequences of innovation which "compensate" workers for job losses initially caused by new technology.

Compensation effects include:

1) By new machines. (The labor needed to build the new equipment that applied innovation requires.)

2) By new investments. (Enabled by the cost savings and therefore increased profits from the new technology.)

3) By changes in wages. (In cases where unemployment does occur, this can cause a lowering of wages, thus allowing more workers to be re-employed at the new lower cost. On the other hand, sometimes workers will enjoy wage increases as their profitability rises. This leads to increased income and therefore increased spending, which in turn encourages job creation.)

4) By lower prices. (Which then leads to more demand, and therefore more employment.) Lower prices can also help offset wage cuts, as cheaper goods will increase workers' buying power.

5) By new products. (Where innovation directly creates new jobs.)

Thus, it is likely that technological growth and the resulting job-creation in high-tech industries might have a more significant spillover effect than the anticipated loss in terms of employment.