Economic Growth and Business Cycles: The Labor Supply Decision with Two Types of Technological Progress

Philip E. Graves

.

DOI: 10.4236/me.2011.23033                

Abstract

An informal model is described that leads to multiple macroeconomic equilibria as a consequence of random variation in the relative amounts of technological change for new and existing goods. The novel observation is that the rate of introduction and market penetration of new goods (sometimes called product innovation) vis-à-vis technological advance for existing goods (sometimes called process innovation) importantly affects the labor supply decision. A relatively rapid influx of new goods will generally increase labor supply, while relatively more technological advance for existing goods will reduce labor supply to the market. These impacts are seen to provide insights into Rostow’s stages of growth. Short run variations in the relative importance of the two types of technological change are seen to imply unpredictable business cycle behavior of the type we observe. The welfare implications of national income accounting that fails to consider changes in leisure are discussed.

Keywords

Labor Supply, Macroeconomics, Business Cycles, Technological Change, New Goods Versus Existing Goods, National Income Accounting

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	P. Aghion and P. Howitt, “A Model of Growth through Creative Destruction,” Econometrica, Vol. 60, No. 2, 1992, pp. 323-351. doi:10.2307/2951599
[2]	F. O. Bilbiie, F. Ghironi and M. J. Melitz, “Endogenous Entry, Product Variety, and Business Cycles,” 2007, (manuscript).
[3]	F. Canova and J. D. Lopez-Salido, “The Labor Market Effects of Technology Shocks,” CEPR Discussion Paper No. 6365, 2007.
[4]	Cass, “Optimum Growth in an Aggregative Model of Capital Accumulation,” Review of Economic Studies, Vol. 32, No. 3, 1965, pp. 233-240. doi:10.2307/2295827
[5]	R. W. Clower, “The Keynesian Counter-Revolution: A Theoretical Appraisal,” In: F. H. Hahn and F. Brechling, Eds., The Theory of Interest Rates, International Economic Association Series, Macmillan, New York, 1965.
[6]	P. A. Diamond, “National Debt in a Neoclassical Growth Model,” American Economic Review, Vol. 55, No. 5, 1965, pp. 1126-1150.
[7]	N. E. Flores and P. E. Graves, “Optimal Public Goods Provision: Implications of Endogenizing the Labor/Lei- sure Choice,” Land Economics, Vol. 84, No. 4, 2008, pp. 701-707.
[8]	P. E. Graves, “A Note on the Valuation of Collective Goods: Overlooked Input Market Free Riding for Non-Individually Incrementable Goods,” The B.E. Journal of Economic Analysis and Policy, Vol. 9, No. 1, pp. 1-17.
[9]	J. Greenwood and G. Uysal, “New Goods and the Transition to a New Economy,” Journal of Economic Growth. Vol. 10, No. 2, 2005, pp. 99-134. doi:10.1007/s10887-005-1668-z
[10]	G. M. Grossman and E. Helpman, “Innovation and Growth in the Global Economy,” MIT Press, Cambridge, 1991.
[11]	T. C. Koopmans, “On the Concept of Optimal Growth,” Cowles Foundation Paper 238, 1965, Reprinted from Academiae Scientiarum Scripta Varia 28, Vol. 1, 1965.
[12]	A. Leijonhufvud, “On Keynesian Economics and the Economics of Keynes,” Oxford University Press, London, 1968.
[13]	R. E. Lucas Jr., “On the Mechanics of Economic Development,” Journal of Monetary Economics, Vol. 22, No. 1, 1988, pp. 3-42. doi:10.1016/0304-3932(88)90168-7
[14]	N. G. Mankiw, D. Romer and D. N. Weil, “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics, Vol. 107, No. 2, 1992, pp. 407- 437. doi:10.2307/2118477
[15]	F. P. Ramsey, “A Mathematical Theory of Saving,” Economic Journal, Vol. 38, No. 152, 1928, pp. 543-559. doi:10.2307/2224098
[16]	D. Romer, “Advanced Macroeconomics,” McGraw-Hill, New York, 1996.
[17]	P. Romer, “Endogenous Technological Change,” Journal of Political Economy, Vol. 98, No. 5, 1990, pp. S71-S102. doi:10.1086/261725
[18]	W. W. Rostow, “The Stages of Economic Growth: A Non-Communist Manifesto,” 3rd Edition, Cambridge University Press, Cambridge, 1990.
[19]	R. Solow, “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics, Vol. 70, No. 1, 1956, pp. 65-94. doi:10.2307/1884513
[20]	N. L. Stokey, “Learning by Doing and the Introduction of New Goods,” The Journal of Political Economy, Vol. 96, No. 4, pp. 701-717. doi:10.1086/261559
[21]	T. W. Swan, “Economic Growth and Capital Accumulation,” Economic Record, Vol. 32, No. 2, 1956, pp. 334- 361. doi:10.1111/j.1475-4932.1956.tb00434.x