INTER-INDUSTRY WAGE DIFFERENTIALS: Sector Model 4


Figure 2.5 depicts an initial wage-effort offer curve and the first changes that are induced by three different kinds of technical change in the capital-intensive sector: a reduction in the rental cost of existing equipment, introduction of new more-costly equipment, and learning by doing. A reduction in the rental cost of the existing equipment simply shifts the intercept upward of the wage-effort line applicable to the capital-intensive sector, as indicated by the positioning of the new wage-effort offer (the dashed gray line). New more costly equipment creates a new wage-effort line that has a lower intercept but a steeper slope – meaning that the rental cost of the equipment is greater but the productivity is higher.

Learning by doing doesn’t affect the rental cost but it increases the productivity. Thus the intercept stays the same but the slope increases. These first effects of new technology create better jobs in the capital-intensive sector and the economy in each case would have to experience an increase in the capital rental rates (interest rate) to ration the capital and encourage workers to stick with jobs in the labor-intensive sector. This is the usual general equilibrium story. Capital is helped/hurt depending on whether the technological change is in the capital-/labor- intensive sector. Unlike the usual case, labor here has a mixed experience.

Before the rental rate of capital is bid up, each of the figures shows an improvement in the high-wage high-effort contracts. When the rental rate of capital is bid up to equilibrate the capital market, the wage-effort offer curve shifts downward across the board. This means that the low-effort low-wage contracts are definitely hurt by whatever kind of technological change may occur in the capital-intensive sector, but it is possible, depending on labor supply elasticities, to have net improvement in the highest-wage highest-effort jobs remaining in the final equilibrium. payday loans direct lender

Unfortunately, the twisting of the wage-effort offer curve associated with technological change is essentially the same as the twisting associated with globalization. Thus we aren’t going to get very far trying to sort trade from technology by only studying the offer curve.

Previous Literature

There is a substantial previous literature on hours and wages. Unlike this paper which explores the demand side, much of the discussion of hours in labor economics is concerned with the supply side: the worker’s choice of hours. The budget constraint often assumed to face workers has earnings proportional to hours worked. An exception is Oi(1962) which assumes that firms experience a fixed training cost for each employee hired. The fixed costs that we emphasize are not training costs but capital rental charges. Another fixed cost that has recently increased in importance is worker benefits paid on a per-worker basis instead of a per-hour basis. Of course, nothing theoretically hinges on what are the fixed costs – the message of the model is that both hours and hourly wage rates should be greater the greater are the fixed costs.