Hwang, Kyuyeon; Han, Junhee
A icle
Employmen shi in esponse o a echnology shock: An
analysis o wo igidi ies and wo agen s
Economies
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MDPI – Mul idisciplina y Digi al Publishing Ins i u e, Basel
Sugges ed Ci a ion: Hwang, Kyuyeon; Han, Junhee (2024) : Employmen shi in esponse o a
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Ci a ion: Hwang, Kyuyeon, and
Junhee Han. 2024. Employmen Shi
in Response o a Technology Shock:
An Analysis o Two Rigidi ies and
Two Agen s. Economies 12: 303.
h ps://doi.o g/10.3390/
economies12110303
Academic Edi o : Ral Fendel
Recei ed: 24 Sep embe 2024
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A icle
Employmen Shi in Response o a Technology Shock:
An Analysis o Two Rigidi ies and Two Agen s
Kyuyeon Hwang 1,* and Junhee Han 2
1School o Applied Economics, Renmin Uni e si y o China, Beijing 100872, China
2Cen e o Compa a i e Economic S udies, Seoul Na ional Uni e si y, Seoul 08826, Republic o Ko ea
*Co espondence: kyuyeonhwang@ uc.edu.cn
Abs ac : This pape examines he ela ionship be ween a echnology shock and employmen ,
conside ing p ice, wage igidi ies, and he e ogeneous agen s. To explo e his ela ionship, we
u ilized a Dynamic S ochas ic Gene al Equilib ium (DSGE) model, inco po a ing households wi h
a ying sa ings a es. Fo empi ical alida ion, we conduc ed a S uc u al Vec o Au o eg ession
(SVAR) analysis using da a om wo economies wi h dis inc sa ings pa e ns— he Uni ed S a es
and China. This app oach allowed us o assess he impac o echnology shocks on employmen
dynamics ac oss di e en sa ings en i onmen s. Unde hese condi ions, we obse e ha he e ec o
echnology on agg ega e employmen is ini ially posi i e. S ill, i g adually dec eases in he mid- e m,
e en ually swi ching o a nega i e impac be o e slowly eco e ing o equilib ium. The eason o
his phenomenon depends on (i) he magni ude o luc ua ions in p ice and wage, p ecisely, which
a iable’s luc ua ions ha e a g ea e magni ude, and (ii) which e ec , be ween income e ec and
subs i u e e ec , is p e e ed by es ic ed and un es ic ed households. Due o (i), eal wages change,
and because o (ii), households make di e en labo supply decisions, leading o luc ua ions in
employmen in esponse o echnology shocks.
Keywo ds: employmen ; wo agen s NK model; echnology shock; luc ua ions
1. In oduc ion
We li e in a wo ld whe e echnological ad ances occu apidly, and we can eadily
obse e hese ans o ma ions. Mo eo e , hese inno a ions en ich ou li es and enhance
he e iciency o ou wo k. The e o e, echnological imp o emen s cons i u e a c ucial
sou ce o economic g ow h. Fo his eason, echnological imp o emen is an in iguing
opic o many economis s. Nume ous s udies del e in o a ious aspec s o echnology
imp o emen , such as de ining i and de ising sui able measu emen me hods.
Addi ionally, esea che s explo e he alidi y o employing he Solow esidual o
assess echnology imp o emen and how o enhance and unde s and he o igins o echno-
logical ad ancemen s (Kend ick 1976;Hamil on 2006). Many economis s a e also explo ing
he easons behind he dispa i ies in echnology le els ac oss coun ies and a e in es i-
ga ing ways o achie e uni o mi y o close alignmen . Jus as esea ch on he o igins o
echnological p og ess has ga ne ed a en ion, so has he s udy o i s e ec s, pa icula ly
he changes in mac oeconomic a iables esul ing om echnological ad ancemen . The
employmen -gene a ing impac s o echnological p og ess, in pa icula , ha e d awn he
in e es o economis s and economic agen s ac oss he boa d, including households, as i
di ec ly impac s hei li elihoods.
Technology shocks no only a ec employmen and p oduc i i y bu also ha e a
signi ican impac on household income and consump ion. When a echnology shock leads
o p oduc i i y imp o emen s, i ms inc ease hei ou pu and, in u n, gene a e highe
e enues. This inc ease in e enue ul ima ely ansla es in o highe household income,
allowing households o engage in g ea e consump ion. A his poin , households ace a
Economies 2024,12, 303. h ps://doi.o g/10.3390/economies12110303 h ps://www.mdpi.com/jou nal/economies
Economies 2024,12, 303 2 o 18
choice ega ding how o alloca e hei inc eased income. Thei esponse can be di ided in o
wo p ima y app oaches. Fi s , households may choose o con e he inc eased income in o
consump ion, he eby immedia ely imp o ing hei s anda d o li ing. Second, hey may
sa e a po ion o hei income o p epa e o u u e unce ain ies. In his con ex , he sa ings
a e becomes a c ucial ac o in de e mining he b oade economic impac o he echnology
shock. I households channel mos o hei inc eased income in o consump ion, his can
s imula e demand, encou age i ms o expand p oduc ion, and gene a e posi i e economic
e ec s. Con e sely, i households inc ease hei sa ings a e, i may lead o educed
consump ion expendi u es, limi ing he po en ial posi i e impac on economic g ow h.
In oday’s apidly changing echnological landscape, unde s anding he e ec s o
echnological ad ancemen s on mac oeconomic a iables is o g ea impo ance. F om his
pe spec i e, he impac on employmen has ga ne ed signi ican a en ion om schola s,
wi h many s udies ocusing on whe he new echnologies can eplace exis ing jobs o
labo . Howe e , such a labo subs i u ion by new echnologies is only easible i he e
is demand o he la es p oduc s c ea ed by hese echnologies. This s udy does no
me ely analyze labo subs i u ion by echnology bu in es iga es he e ec s o echnological
changes on employmen h ough i s in e ac ion wi h o he mac oeconomic a iables. I
also explo es he impac o echnological change in coun ies wi h di e en sa ings a es,
which in luence consump ion, making his a aluable con ibu ion o he ield. Howe e ,
mos o he exis ing li e a u e has ocused on he e ec s o echnology shocks om a job
c ea ion o eplacemen pe spec i e. The e has been ela i ely li le esea ch examining
he impac o echnology shocks on employmen h ough changes in ou pu , consump ion,
and sa ings. This s udy examines he e ec s o ex e nal echnology shocks on employmen
h ough changes in ou pu , p ices, wages, and consump ion. To assess he impac o
echnology shocks on employmen , i is i s necessa y o analyze how changes in ou pu
in luence p ice, wage in la ion, and luc ua ions in eal wages. In addi ion o examining he
a ia ions in hese mac oeconomic a iables, he s udy explo es how di e ing sa ings a es
a ec consump ion and in luence changes in consump ion and employmen in esponse o
echnology shocks. To examine employmen luc ua ions esul ing om echnology shocks,
he DSGE me hodology was u ilized. He e ogeneous agen s we e inco po a ed in o he
heo e ical model o ep esen di e en sa ings a es, allowing he de i a ion o impulse
esponse unc ions. On he empi ical side, da a om he Uni ed S a es and China, which
ha e signi ican ly di e en sa ings a es, we e used o analyze he employmen e ec s o
echnology shocks using he SVAR me hod. This empi ical analysis was hen compa ed o
he simula ions de i ed om he heo e ical model o a comp ehensi e analysis. We also
ound ha he employmen e ec s o echnology shocks a ied signi ican ly depending
on di e ences in sa ings a es unde iden ical condi ions. When he sa ings a e was
lowe , he inc eased ou pu om he echnology shock was abso bed in o consump ion,
leading o mo e signi ican employmen gains. Howe e , his also caused eal wages o
ise, wi h wage g ow h ou pacing p ice inc eases, which began o diminish he posi i e
employmen e ec s o he echnology shock. In o he wo ds, he c i ical de e minan o he
impac o echnology shocks on employmen is whe he he inc eased ou pu ansla es
in o consump ion, which is mo e p onounced unde lowe sa ings a es.
In he ollowing sec ion, he exis ing li e a u e on he impac o echnology shocks on
employmen will be e iewed, along wi h an explana ion o he heo e ical backg ound o
his s udy. In Sec ion 3, an empi ical analysis will be conduc ed using he SVAR app oach
o examine he e ec s o echnology shocks on employmen and o he mac oeconomic
a iables in wo coun ies wi h di e ing sa ings a es ( he Uni ed S a es and China).
Sec ion 4will in oduce a DSGE model ha inco po a es di e ences in sa ings a es and
de i es he sys em equa ions o explain he causes o he empi ical indings om Sec ion 3,
pa icula ly hose s emming om a ia ions in sa ings beha io . In Sec ion 5, pa ame e
alues used in he model will be es ima ed, ollowed by simula ions o explo e how sa ings
a es in e ac wi h o he mac oeconomic a iables o in luence he employmen e ec s o
Economies 2024,12, 303 3 o 18
echnology shocks. Finally, Sec ion 6will conclude by summa izing he esul s and o e ing
closing ema ks based on he indings.
2. Li e a u e Re iew and Hypo heses De elopmen
2.1. Rela ed Li e a u e
Much o he li e a u e has a emp ed o explo e he ela ionship be ween echnology
shocks and employmen h ough heo e ical and empi ical app oaches. E en hough almos
all economis s ag ee ha echnological ad ancemen b ings ou pu g ow h, he di ec ion in
which employmen changes emains ambiguous, and schola s ha e no consensus.
One no able con ibu ion (o pe haps he one ha s a ed his popula puzzle) is
ha o Lucas and Rapping (1969), who heo e ically in es iga ed he dynamics o labo
in esponse o changes in p ices and ou pu h ough hei s uc u al equa ions. The
ela ionship be ween echnology shocks and employmen emains ambiguous. Howe e ,
in he con en ional Real Business Cycle (RBC) model, echnology is a d i ing o ce o
he economy and plays a signi ican ole in explaining economic luc ua ion (F ancis
and Ramey 2005). Wi h his RBC model, labo becomes p ocyclical, inc easing wi h he
ou pu s imula ed by a echnology shock. Wang and Wen (2011) show ha a echnology
shock emains a p ima y ac o in explaining luc ua ions
1
.Mum az and Zane i (2012)
disco e ed ha employmen inc eases ollowing echnological imp o emen using a DSGE
model wi h p ice igidi y and labo ma ke sea ch ic ions
2
. Fo empi ical s udies ocused
on he echnology e ec , Ch is iano e al. (2003) u ilize aw da a, di e enced da a, and
de ended da a o pe capi a wo k hou s o ind ha employmen inc eases in esponse o
a echnology shock. Dupaigne e al. (2005) also u ilizes di e en speci ica ions o hou s
and le el da a o disco e a posi i e co ela ion be ween echnology shocks and hou s
wo ked. This esul aligns wi h he RBC model’s indings. Choi and Shim (2022) iden i y
a posi i e e ec o echnology on employmen using he S uc u al VAR model wi h TFP
(To al Fac o P oduc i i y) ins ead o labo p oduc i i y, in bo h de eloped and de eloping
coun ies, al hough his e ec is ela i ely small in de eloping coun ies. Alexopoulos
(2011) examines new book i les ela ed o echnology as a p oxy o echnology shocks and
inds ha echnology posi i ely impac s employmen . Empi ical analyses on he impac
o echnological p og ess on employmen ha e been ac i ely conduc ed using a ious
employmen indica o s and da a ep esen ing echnological ad ancemen s. The esul s
o en di e depending on he da a used in he analysis.
Howe e , ad oca es o New Keynesian models see i di e en ly. Galí(1999) e ealed
a nega i e long- un e ec on employmen due o labo p oduc i i y, using da a om
G7 coun ies. Fu he mo e, he nega i e impac o labo p oduc i i y on employmen
is a ibu ed o p ice igidi y. Shea (1998) also ound a nega i e e ec o echnology
imp o emen on employmen using R&D spending and pa en ac i i y da a. F ancis and
Ramey (2005) ex ended Galí’s iden i ica ion scheme and concluded a nega i e e ec on
employmen due o echnology shock exis s
3
.Sme s and Wou e s (2005) show he impac
o echnology on Eu opean coun ies using a New Keynesian model wi h p ice and wage
igidi ies and VARs analysis. Thei conclusion indica es ha a posi i e p oduc i i y shock
g adually inc eases ou pu , consump ion, in es men , and he eal wage. Howe e , i
also nega i ely impac s employmen , which aligns wi h he indings documen ed o he
Uni ed S a es (Galí1999). Basu e al. (2006) also a emp ed o isola e non- echnological
e ec s om he TFP (To al Fac o P oduc i i y) and used pu e- echnological e ec s as a
echnology indica o . They ound ha echnology shocks signi ican ly educe employmen
and non- esiden ial in es men in he sho un. Fo empi ical s udies, Be inelli e al.
(2022) examine he e ec o echnology on employmen by di iding he open economy
model in o he aded goods pa and he non- aded goods pa . Using da a om OECD
coun ies be ween 1970 and 2013, hey ound ha a echnology shock hu s he aded goods
sec o , hus, i has a nega i e impac on employmen in he aded goods sec o . Simila ly,
Colla d and Dellas (2004) and Colla d and Dellas (2007) also concluded ha echnological
imp o emen dec eases employmen i domes ic and o eign goods a e complemen a y4.
Economies 2024,12, 303 4 o 18
As one can see, esea che s epo di e en esul s depending on how hey s uc u e
his p oblem. To o e come his ma e , ins ead o aking a dicho omous iew o which
di ec ion employmen mo es when he e is a posi i e echnology shock, s udies a e aking
a b oade pe spec i e by looking a sec o s (indus ies) and seeing how employmen
esponds di e en ly. Chang and Hong (2006) used he VAR model o in es iga e he impac
o echnology shocks on employmen wi hin he US manu ac u ing indus y. The esul s
e ealed ha ou o 458 4-digi indus ies, only 133 indus ies showed a signi ican inc ease
in employmen due o a echnology shock. In compa ison, only 25 indus ies subs an ially
dec eased employmen due o a echnology shock. They ound no signi ican ela ionship
be ween employmen and p ice igidi y. In o he wo ds, he e mus be a eason why he
impac o a echnology shock a ies om one company o ano he . Kim and Chun (2011)
sugges ha i ms’ a ying esponses o echnology shocks a e a ibu ed o p oduc ion-
ela ed cos s. Using US manu ac u ing i m da a, hey analyzed he sho - e m impac o
echnology shocks on employmen . Thei indings e ealed ha i ms wi h a low in en o y
a io expe ience a mo e signi ican inc ease in employmen when echnology shocks occu ,
while i ms wi h a high in en o y a io show a ela i ely mino inc ease in employmen .
This ela ionship is associa ed wi h he cos o s o ing in en o y, and he s udy con i ms
ha echnology shocks, ega dless o hei magni ude, posi i ely a ec employmen . Chang
e al. (2006) examined he impac o echnology shocks on employmen decisions h ough
a simple model o indus y employmen . They ound ha ac o s ela ed o p oduc ion
and sales signi ican ly in luence a company’s employmen esponse o echnology shocks.
Di e ences in in en o y s o age cos , demand elas ici y, and p ice igidi y among indus ies
we e c ucial de e minan s o employmen .
Consequen ly, indus ies wi h lowe in en o y managemen cos s, highe demand
elas ici y, and g ea e p ice lexibili y expe ienced inc eased employmen when exposed
o echnology shocks. Malley and Musca elli (1997), using a semi-s uc u al ec o au o e-
g essi e model, e ealed ha echnological inno a ion leads o he capi aliza ion e ec ,
elimina ing jobs wi h low p oduc i i y and c ea ing jobs in many new indus ies wi h
high p oduc i i y. Conce ned wi h he c ea ion o new employmen eac ing o echnical
p og ess, Au o e al. (2003) conduc ed an empi ical analysis using da a om 1960 o
1998, which con i med ha echnological ad ancemen s, pa icula ly in au oma ion and
compu e iza ion, led o a educ ion in employmen in indus ies wi h many simple and
epe i i e asks while inc easing employmen in indus ies wi h i egula and complex
asks. In o he wo ds, he s udy e ealed ha echnological de elopmen can ac as subs i-
u e and complemen employmen in a sec o -le el analysis. Th ough p io s udies, he
ocus has g adually shi ed om analyzing he o e all impac o echnology shocks on o al
employmen o examining hei e ec s on employmen by sec o . This shi s ems om he
ambiguous e ec s o echnology shocks on o al employmen . In his s udy, we con i m
ha he impac o echnology shocks on o al employmen does no simply ake he o m
o a s aigh o wa d inc ease o dec ease. Ra he , he esponse o o al employmen can
exhibi bo h pa e ns—an ini ial inc ease ollowed by a dec ease o ice e sa—depending
on changes in o he mac oeconomic a iables such as ou pu , in la ion, and wages. Fu he -
mo e, we will show ha he cause o hese esul s lies in he luc ua ions in ou pu d i en
by echnology shocks, which a e ampli ied by changes in consump ion and wages due o
households’ sa ing beha io .
2.2. Theo e ical Backg ound
One o he main heo e ical amewo ks o s udying mac oeconomic ola ili y caused
by ex e nal shocks is he Real Business Cycle (RBC) model, which was de eloped by
Kydland and P esco (1977,1982). This heo y explains economic luc ua ions h ough
eal ac o s, pa icula ly p oduc i i y shocks. The cen al idea is ha business cycles
a e p ima ily d i en by exogenous echnology shocks, which a ec p oduc i i y, leading
o changes in he alloca ion o esou ces ac oss he economy, he eby causing economic
luc ua ions. Howe e , in eali y, he immedia e a ainmen o ma ke equilib ium, as
Economies 2024,12, 303 5 o 18
sugges ed by he RBC model, may only some imes occu . To add ess his limi a ion, he
New Keynesian Economics school in oduced he DSGE model, which inco po a es a ious
ma ke ic ions obse ed in he eal wo ld. In DSGE models, ma ke ine iciencies like
p ice, wage s ickiness, and inancial ic ions p e en an immedia e ma ke equilib ium,
causing mac oeconomic a iables o espond di e en ly o shocks. These ic ions delay
p ice and wage adjus men s and cons ain i ms’ abili y o secu e ex e nal unding, making
he economy mo e sensi i e o shocks. As a esul , DSGE models p o ide a mo e ealis ic
ep esen a ion o economic esponses and a e aluable o analyzing he e ec s o policy
measu es. Ch is iano e al. (2005), in hei esea ch, sugges ha models inco po a ing he
assump ion o wage igidi y o e a easonable explana ion o he a ia ion in mac oeco-
nomic a iables in esponse o ex e nal shocks. Simila ly, Blancha d and Galí(2007) no iced
ha he New Keynesian model wi h eal wage igidi ies p o ides a be e desc ip ion o
he eal economy compa ed o one solely based on p ice igidi y. A limi a ion o he NK
model is he assump ion o a ep esen a i e household, which means all households beha e
iden ically wi hin he model. I is ecommended ha he e ogeneous ea u es a e inco po-
a ed in o he model o be e unde s and agg ega e issues by analyzing households wi h
di e en cha ac e is ics (Gu enen 2011;Kaplan e al. 2018). Modeling he eal economy is
challenging due o i s complexi y and b oad scope. As demons a ed abo e, in eg a ing a
ange o cha ac e is ics among economic agen s can b idge he gap be ween he model and
he eal economy, acili a ing a be e unde s anding o he impac o ex e nal shocks on he
mac oeconomy. In his con ex , he p ima y challenge lies in iden i ying he sou ces o he -
e ogenei y. Recen s udies inc easingly examine luc ua ions in mac oeconomic a iables
by in oducing he e ogenei y o b oadening he di e si y o economic agen s. Howe e ,
his esea ch p ima ily emphasizes ampli ying ex e nal shocks h ough he e ogenei y o
inancial ic ions. In con as , his s udy ocuses on he impac o echnology shocks on
ou pu , household consump ion beha io , and employmen dynamics by inco po a ing he
sa ings a e in o he model, hus cap u ing he e ec s o p ice and wage adjus men s on
hese a iables.
As p e ious li e a u e has shown, he di ec ion o employmen luc ua ions in e-
sponse o echnology shocks emains ambiguous. This pape es ablishes a DSGE model
wi h p ice and wage igidi ies and he e ogeneous households, including “ ule-o - humb”
households ha do no sa e a all. We will show ha o economies wi h highe a ios o
he ule-o - humb households (lowe sa ings a e), employmen ini ially expe iences an
eno mous inc ease compa ed o when his a e is low when a posi i e echnology shock
occu s. We e alua e he p edic i e accu acy o he es ima ed DSGE model agains Vec-
o Au o eg essions (VARs) and S uc u al VARs (SVAR) using he same da a se . The
es ima ed model also analyzes he ac o s in luencing business cycle luc ua ions in wo
economies wi h signi ican ly di e en sa ings a es ( he Uni ed S a es and China). Ou
empi ical indings om hese wo coun ies suppo ou heo e ical esul s, indica ing ha
changes in agg ega e echnology emain a signi ican d i e o business cycles.
3. Empi ical Analysis
In his sec ion, we use SVAR o analyze he impac o echnological change on he
model we de eloped and examine eal-wo ld da a om he US and China using i e
a iables (Technology, GDP, Employmen , Wage, and In la ion). Figu e 1illus a es he
di e ence in sa ings a es be ween he Uni ed S a es and China. In his s udy, o examine
he impac o sa ings a e di e ences on employmen luc ua ions caused by echnology
shocks, we used da a om he Uni ed S a es and China, which exhibi a ela i ely signi ican
di e ence in sa ings a es. Since i is challenging o ind disc e e di e ences in sa ings
a es wi hin a single coun y a a speci ic ime, he empi ical analysis was conduc ed
o in es iga e how echnology shocks a ec he mac oeconomic a iables o hese wo
economies. The US da a include he GDP, in la ion a e, eal wage, employmen , and o al
ac o p oduc i i y (TFP). Mos da a a e de i ed om FRED, while employmen da a a e
ob ained om he US Bu eau o Labo S a is ics. The da a on China’s GDP, in la ion a e,
Economies 2024,12, 303 6 o 18
eal wage, and employmen a e ob ained om he Na ional Bu eau o S a is ics o China.
Fu he mo e, we u ilize China’s TFP da a om Penn Wo ld Table 10.01. When selec ing
echnological imp o emen da a, i is essen ial o conside he measu es esea che s use, as
emphasized by (Ch is iano e al. 2003).
Economies 2024, 12, x FOR PEER REVIEW 6 o 19
sa ings a es wi hin a single coun y a a speci ic ime, he empi ical analysis was con-
duc ed o in es iga e how echnology shocks affec he mac oeconomic a iables o hese
wo economies. The US da a include he GDP, in la ion a e, eal wage, employmen , and
o al ac o p oduc i i y (TFP). Mos da a a e de i ed om FRED, while employmen da a
a e ob ained om he US Bu eau o Labo S a is ics. The da a on China’s GDP, in la ion
a e, eal wage, and employmen a e ob ained om he Na ional Bu eau o S a is ics o
China. Fu he mo e, we u ilize China’s TFP da a om Penn Wo ld Table 10.01. When se-
lec ing echnological imp o emen da a, i is essen ial o conside he measu es esea ch-
e s use, as emphasized by (Ch is iano e al. 2003).
Figu e 1. Sa ings a e in he US and China.
This empi ical in es iga ion uses TFP da a o ep esen echnological changes ins ead
o labo p oduc i i y. This choice is made because labo p oduc i i y includes no only
he inpu mix bu also e lec s he p ope y o imp o ed efficiency. The e o e, he TFP is
conside ed a pu e measu e o explaining echnological changes (Chang and Hong 2006).
Figu e 2 shows he dis ibu ion o he ime se ies a iables o bo h economies, which ha e
been smoo hed and s anda dized using he HP il e . This allows us o assess he alidi y
o analyzing hese ime se ies da a.
Figu e 2. Dis ibu ion o s anda dized a iables.
Figu e 1. Sa ings a e in he US and China.
This empi ical in es iga ion uses TFP da a o ep esen echnological changes ins ead
o labo p oduc i i y. This choice is made because labo p oduc i i y includes no only
he inpu mix bu also e lec s he p ope y o imp o ed e iciency. The e o e, he TFP is
conside ed a pu e measu e o explaining echnological changes (Chang and Hong 2006).
Figu e 2shows he dis ibu ion o he ime se ies a iables o bo h economies, which ha e
been smoo hed and s anda dized using he HP il e . This allows us o assess he alidi y
o analyzing hese ime se ies da a.
Economies 2024, 12, x FOR PEER REVIEW 6 o 19
sa ings a es wi hin a single coun y a a speci ic ime, he empi ical analysis was con-
duc ed o in es iga e how echnology shocks affec he mac oeconomic a iables o hese
wo economies. The US da a include he GDP, in la ion a e, eal wage, employmen , and
o al ac o p oduc i i y (TFP). Mos da a a e de i ed om FRED, while employmen da a
a e ob ained om he US Bu eau o Labo S a is ics. The da a on China’s GDP, in la ion
a e, eal wage, and employmen a e ob ained om he Na ional Bu eau o S a is ics o
China. Fu he mo e, we u ilize China’s TFP da a om Penn Wo ld Table 10.01. When se-
lec ing echnological imp o emen da a, i is essen ial o conside he measu es esea ch-
e s use, as emphasized by (Ch is iano e al. 2003).
Figu e 1. Sa ings a e in he US and China.
This empi ical in es iga ion uses TFP da a o ep esen echnological changes ins ead
o labo p oduc i i y. This choice is made because labo p oduc i i y includes no only
he inpu mix bu also e lec s he p ope y o imp o ed efficiency. The e o e, he TFP is
conside ed a pu e measu e o explaining echnological changes (Chang and Hong 2006).
Figu e 2 shows he dis ibu ion o he ime se ies a iables o bo h economies, which ha e
been smoo hed and s anda dized using he HP il e . This allows us o assess he alidi y
o analyzing hese ime se ies da a.
Figu e 2. Dis ibu ion o s anda dized a iables.
Figu e 2. Dis ibu ion o s anda dized a iables.
We empi ically examine he e ec o echnology om 1979 o 2019 on he US and
China. Al hough he pe iods o he wo coun ies di e , his does no pose a p oblem,
as ou objec i e is no o di ec ly compa e he e ec o echnological changes be ween
he coun ies. Ins ead, we aim o unde s and his e ec in he eal wo ld and compa e
i wi h he ou comes om he model we de eloped. We unde ake empi ical analysis o
Economies 2024,12, 303 7 o 18
compa e he luc ua ions be ween he de eloped model and he ac ual economy. Be o e
conduc ing he empi ical analysis, we ini ially apply da a di e encing o s abilize he
ime se ies and s anda dize he da a o achie e a uni o m dis ibu ion. Following hese
p ocedu es, we use VAR and SVAR analyses using a 5-dimensional ec o ime se ies
deno ed as
X =(TFP, GDP, Employmen , Wage, In la ion)
. He e,
β
is a lowe iangula
ma ix wi h a diagonal o 1, ob ained using Cholesky decomposi ion, and
i
,
j
ep esen s
he dimensions. Las ly, ε is a whi e noise e o e m consis ing o i e dimensions.
The s uc u al VAR model is ou lined below:
10000
E1 0 0 0
E E 1 0 0
EEE1 0
EEEE1
TFP
GDP
Employmen
Wage
In la ion
=C+
i
∑
j=1
βjXj+
E0000
0E000
0 0 E0 0
000E0
0000E
ε
As illus a ed in Figu e 3, hese wo obse a ions iden i ied using he o hogonalized
VAR model also mani es in ou s uc u al VAR analysis.
Economies 2024, 12, x FOR PEER REVIEW 7 o 19
We empi ically examine he effec o echnology om 1979 o 2019 on he US and
China. Al hough he pe iods o he wo coun ies diffe , his does no pose a p oblem, as
ou objec i e is no o di ec ly compa e he effec o echnological changes be ween he
coun ies. Ins ead, we aim o unde s and his effec in he eal wo ld and compa e i wi h
he ou comes om he model we de eloped. We unde ake empi ical analysis o compa e
he luc ua ions be ween he de eloped model and he ac ual economy. Be o e conduc ing
he empi ical analysis, we ini ially apply da a diffe encing o s abilize he ime se ies and
s anda dize he da a o achie e a uni o m dis ibu ion. Following hese p ocedu es, we
use VAR and SVAR analyses using a 5-dimensional ec o ime se ies deno ed as X=
TFP, GDP, Employmen , Wage, Inla ion. He e, 𝛽 is a lowe iangula ma ix wi h a di-
agonal o 1, ob ained using Cholesky decomposi ion, and 𝑖,𝑗 ep esen s he dimensions.
Las ly, 𝜀 is a whi e noise e o e m consis ing o i e dimensions.
The s uc u al VAR model is ou lined below:
⎣
⎢
⎢
⎢
⎡
10000
𝐸1000
𝐸𝐸100
𝐸𝐸𝐸10
𝐸𝐸𝐸𝐸1
⎦
⎥
⎥
⎥
⎤
⎣
⎢
⎢
⎢
⎡
𝑇𝐹𝑃
𝐺𝐷𝑃
𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
𝑊𝑎𝑔𝑒
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 ⎦
⎥
⎥
⎥
⎤
=C+𝛽
𝑋+⎣
⎢
⎢
⎢
⎡
𝐸0000
0𝐸000
00𝐸00
000𝐸0
0000𝐸
⎦
⎥
⎥
⎥
⎤
𝜀
As illus a ed in Figu e 3, hese wo obse a ions iden i ied using he o hogonalized
VAR model also mani es in ou s uc u al VAR analysis.
Figu e 3. Impulse esponse unc ion o TFP shock (s uc u al VAR).
In Figu e 3, he blue line ep esen s he a ia ion o he espec i e a iable in esponse
o an ex e nal shock, while he dashed line indica es he 95% con idence in e al. As de-
pic ed in Figu e 1, he Uni ed S a es has he lowes sa ings a e among hese wo coun-
ies. In o he wo ds, when an exogenous echnology shock occu s, i s impac will be mos
signi ican in he U.S. This is because he sa ings a e can in luence consump ion in e-
sponse o an ex e nal shock ha inc eases ou pu . Speci ically, i he sa ings a e is low,
highe consump ion o he inc eased ou pu will lead o g ea e luc ua ions in mac oeco-
nomic a iables in esponse o he echnology shock. Con e sely, i he sa ings a e is
high, addi ional consump ion emains ela i ely limi ed, esul ing in smalle luc ua ions
Figu e 3. Impulse esponse unc ion o TFP shock (s uc u al VAR).
In Figu e 3, he blue line ep esen s he a ia ion o he espec i e a iable in esponse
o an ex e nal shock, while he dashed line indica es he 95% con idence in e al. As de-
pic ed in Figu e 1, he Uni ed S a es has he lowes sa ings a e among hese wo coun ies.
In o he wo ds, when an exogenous echnology shock occu s, i s impac will be mos signi i-
can in he U.S. This is because he sa ings a e can in luence consump ion in esponse o an
ex e nal shock ha inc eases ou pu . Speci ically, i he sa ings a e is low, highe consump-
ion o he inc eased ou pu will lead o g ea e luc ua ions in mac oeconomic a iables
in esponse o he echnology shock. Con e sely, i he sa ings a e is high, addi ional
consump ion emains ela i ely limi ed, esul ing in smalle luc ua ions in hese a iables.
As shown in Figu e 3, in China, whe e he sa ings a e is high, he employmen e ec s o a
echnology shock appea o diminish sligh ly. In con as , in he Uni ed S a es, whe e he
sa ings a e is lowe , he e ec s show a sligh inc ease, wi h luc ua ions be ween inc eases
and dec eases. These esul s align wi h p e ious s udies, such as F ancis and Ramey (2005);
Blancha d and Galí(2010); Riggi and Tancioni (2010); and Ba nichon (2010), which ound
Economies 2024,12, 303 8 o 18
ha in economies wi h high sa ings a es, ma ke ine iciencies cause echnology shocks
o ha e a nega i e impac on employmen . Simila ly, he indings o low-sa ings- a e
economies a e consis en wi h he s udies by Basu e al. (2006); Sme s and Wou e s (2007);
and Mni e al. (2018), which demons a ed ha echnology shocks ha e a posi i e e ec
on employmen in such economies. Howe e , i would be somewha ambiguous o make
a di ec compa ison in ou empi ical analysis, e en hough he DSGE model ends and
empi ical esul s exhibi simila di ec ions.
The e o e, we p opose ha he esul s display sligh de ia ions om he model,
possibly a ising due o nuanced a ia ions in each coun y’s economic condi ions and
speci ic ci cums ances. I is indispu able ha disc epancies in household sa ings a es play
a subs an ial ole in in luencing he luc ua ions o mac oeconomic a iables in esponse o
ex e nal shocks, e en when all o he condi ions a e consis en wi hin he model.
4. The Model Economy
Fo simplici y, we conside an economy wi hou capi al ollowing (McCallum and
Nelson 1999). This economy consis s o he e ogeneous, in ini ely li ed households indexed
by
j∈[0, 1]
. Households can adjus hei nominal wage in he labo ma ke , and he e is a
pe ec ly compe i i e inal goods i m. Simila ly o households, i ms ha e he lexibili y
o se hei p ices eely. The p obabili y o being unable o change he p ice in any gi en
pe iod is
θp
. This ep esen s he p opo ion o all i ms ha main ain hei p ices om he
p e ious pe iod, while he es o he i ms
1−θp
ese hei p ices. Apa om including
he e ogeneous households and he absence o capi al, ou model s uc u e esembles a
s anda d DSGE model ollowing (Blancha d and Galí2007). The de i a ion me hods o
he model equa ions p esen ed in his chap e a e de ailed in he Supplemen a y Ma e ial.
4.1. Fi m Sec o
The e is a pe ec ly compe i i e inal goods i m in his economic se ing, bu house-
holds possess monopoly powe in he labo ma ke . This c ea es a wo-dimensional
p oblem o i ms o na iga e. Fi s , i ms mus de e mine he op imal combina ion o labo
ha maximizes ou pu o any gi en le el o labo cos s. Second, i ms mus se p ices o
maximize p o i s a e ob aining he op imal labo ec o .
Fi ms mus i s sol e he ollowing p oblem o iden i y he ou pu -maximizing com-
bina ion o labo :
max
Nij Z1
0N
εw−1
εw
ij djεw
εw−1≡N (1)
s. Z1
0Wj Nij dj ≤Z (2)
L=Z1
0N
εw−1
εw
ij djεw
εw−1+Z −Z1
0Wj Nij dj(3)
whe e
Wj
ep esen s he wage o wo ke ype
j
in pe iod ,
Nij
is he quan i y o ype
j
labo employed by i m
i
, and
Ni
deno es o al labo used by i m
i
. The elas ici y o
subs i u ion among labo ypes is deno ed εw.
Upon sol ing Equa ion (3), we ob ain
Nij =Wj
Wk εw·Nik
, and subsequen ly, we
can de i e he nominal wage o a ype
j
wo ke in pe iod by subs i u ing
Nij
in o
Equa ion (1), as ollows:
W =Z1
0W1−εw
j dj1
1−εw(4)
By u ilizing equa ion
Nij =Wj
Wk εw·Nik
and Equa ion (4), we can de e mine he
labo demand o i m i, as ollows:
Economies 2024,12, 303 15 o 18
and u ilizing employmen da a de i ed om hou ly labo , we ha e es ablished ha a
echnology shock leads o sho - e m employmen g ow h, ollowed by medium- e m
con ac ion, which ul ima ely s abilizes in he long e m. This phenomenon is in e p e ed
as a mani es a ion o employmen luc ua ions d i en by changes in eal wages esul ing
om a ia ions in p ices and wages wi hin he model. Thi dly, no able dispa i ies in
consump ion and labo ac i i y esponses we e obse ed be ween households ha sa e
and hose ha do no , pa icula ly in he con ex o inc easing eal wages.
6. Conclusions and Policy Recommenda ions
In oday’s wo ld, whe e he pace and scale o echnological inno a ion a e a g ea e
han e e be o e, and echnological ad ancemen s a e quickly in eg a ed in o e e yday li e,
unde s anding he impac o echnology on mac oeconomic a iables has become c i ically
impo an . Among hese, he e ec s o echnology on employmen ha e p oduced mixed
esul s in p e ious s udies, wi h many showing a ying ou comes and e en con lic ing
di ec ions. The pu pose o his s udy is o explo e he easons behind hese disc epancies
and o unde s and how echnology impac s employmen h ough key media ing ac o s.
To achie e his, his s udy examines how echnology in luences p oduc i i y and, h ough
changes in ou pu , how i in e ac s wi h consump ion and sa ings beha io o a ec
employmen . This esea ch iden i ies se e al key indings.
Fi s , in he sho e m, employmen inc eases ollowing a posi i e echnology shock.
This is la gely due o eal wage g ow h d i en by slowe p ice in la ion ela i e o wage
in la ion. This esul aligns wi h much o he exis ing empi ical and heo e ical li e a u e.
Fo ins ance, he s udies by Mum az and Zane i (2012) and Ch is iano e al. (2003) ound
simila sho - e m employmen inc eases a e a echnology shock, consis en wi h he
RBC model.
Second, he posi i e employmen esponse diminishes o e he mid- e m and e en u-
ally u ns nega i e. This decline can be a ibu ed o decele a ing eal wage g ow h as p ice
in la ion ca ches up wi h wage in la ion. This inding aligns mo e wi h New Keynesian
models, whe e wage and p ice igidi ies cause empo a y labo ma ke dis up ions, as
discussed by Galí(1999) and F ancis and Ramey (2005). The esul s also echo he indings
o Basu e al. (2006), who obse ed ha echnology shocks educe employmen in sec o s
a ec ed by eal wage adjus men s in he sho un.
Thi d, he sa ings a e signi ican ly shapes he magni ude o he impac o echnology
shock. This is a no able con ibu ion o he li e a u e, as many p e ious s udies ha e ye o
emphasize household sa ings a es as a de e minan o employmen luc ua ions.
Fou h, he s udy highligh s ha es ic ed ( ule-o - humb) and un es ic ed house-
holds espond di e en ly o echnology shocks. Res ic ed households end o inc ease hei
consump ion and labo supply, while un es ic ed households educe hei labo supply
as wages ise. This inding con ibu es o he ongoing discussion abou he e ogeneous
household beha io in esponse o echnology shocks, e lec ing simila conclusions d awn
by Au o e al. (2003) and Saijo (2019), who examined how echnological change a ec s
households di e en ly based on hei consump ion and sa ings pa e ns. The obse ed
di e ences be ween es ic ed and un es ic ed households p o ide new insigh s in o how
sa ings a es and labo supply decisions in luence employmen dynamics.
Fu he mo e, his s udy has iden i ied ha while echnology shocks ini ially ha e a
posi i e impac on employmen , he e is a endency o employmen o decline in he mid-
o-long e m. To add ess his issue, se e al policy solu ions a e p oposed. This nega i e
esponse is la gely due o ising eal wages caused by p ice and wage igidi y. Speci ically,
es ic ed ( ule-o - humb) households expe ience limi ed changes in labo supply, while un-
es ic ed households educe hei labo supply as wages ise, leading o an o e all decline
in employmen o e ime. To mi iga e his long- e m employmen decline, policymake s
can implemen se e al key s a egies. Fi s , s eng hening labo ma ke lexibili y is c ucial,
as wage igidi y is one o he p ima y d i e s o employmen educ ion ollowing ech-
nology shocks. When wages do no adjus in line wi h echnological p og ess, eal wages
Economies 2024,12, 303 16 o 18
ise, which in u n educes labo demand. Inc easing wage lexibili y could help ease his
long- e m employmen decline. This could be achie ed h ough e o ms o labo ma ke
ins i u ions, such as allowing mo e lexible wage nego ia ions, loosening legal es ic ions
on wage adjus men s, o es uc u ing he ba gaining p ocesses be ween employe s and
wo ke s. Addi ionally, go e nmen s could o e incen i es o encou age businesses o
adop mo e lexible wage policies, such as ax bene i s o i ms ha implemen wage
s uc u es linked o p oduc i i y.
In addi ion, enhancing educa ion and e aining p og ams is essen ial, as echnological
shocks o en b ing s uc u al changes o he labo ma ke , esul ing in job displacemen .
In es ing in educa ion and e aining p og ams, pa icula ly o wo ke s in indus ies a
isk o au oma ion o echnological displacemen , is i al. Go e nmen s should suppo
eskilling ini ia i es ha allow wo ke s in declining sec o s o acqui e new skills and
ansi ion in o g owing indus ies. Addi ionally, i is impo an o p omo e digi al and IT
skills, as much o oday’s echnological ad ancemen occu s in hese ields. Na owing
he digi al skills gap will enable mo e wo ke s o ake ad an age o new oppo uni ies
c ea ed by echnological change. Equally impo an is he s eng hening o social sa e y
ne s, pa icula ly o wo ke s in indus ies wi h high wage igidi y o low labo ma ke
lexibili y, who a e a g ea e isk o job loss due o echnological changes. Expanding
unemploymen bene i s and income suppo p og ams will help wo ke s main ain a basic
s anda d o li ing while hey sea ch o new employmen . Addi ionally, discussions a ound
implemen ing basic income could be impo an , as ongoing au oma ion and echnological
ad ancemen s may con inue o impac employmen le els o e he long e m. Basic income
could se e as a ool o equi ably dis ibu ing he bene i s o echnological p og ess.
This s udy models he e ogenei y p ima ily h ough a ia ions in sa ings a es. In u-
u e esea ch, inco po a ing addi ional dimensions o he e ogenei y, such as household deb ,
as well as in eg a ing capi al and mul iple p oduc ion agen s (e.g., housing), could p o ide
a mo e de ailed analysis o how echnology shocks impac p oduc i i y and employmen
h ough capi al- ela ed channels. While his s udy cen e s on he immedia e employmen
e ec s and simpli ies he model by excluding capi al, we belie e his app oach o e s clea
insigh s in o he in e ac ions be ween consump ion, sa ings, and labo dynamics.
Supplemen a y Ma e ials: The ollowing suppo ing in o ma ion can be downloaded a : h ps:
//www.mdpi.com/a icle/10.3390/economies12110303/s1. An Online Appendix o his a icle can
be ound a Economies online.
Au ho Con ibu ions: Concep ualiza ion, J.H.; Da a cu a ion, K.H. and J.H.; In es iga ion, K.H. and
J.H.; Me hodology, K.H.; W i ing—o iginal d a , K.H. and J.H.; W i ing— e iew & edi ing, K.H. and
J.H. All au ho s ha e ead and ag eed o he published e sion o he manusc ip .
Funding: This esea ch ecei ed no ex e nal unding.
Ins i u ional Re iew Boa d S a emen : No applicable.
In o med Consen S a emen : No applicable.
Da a A ailabili y S a emen : Da a will be made a ailable on eques .
Con lic s o In e es : The au ho s decla e no con lic o in e es .
No es
1
Acco ding o hei esea ch, echnological imp o emen plays a ole in inc easing employmen in he mid o long un, using a
pe ec ly compe i i e lexible-p ice RBC model wi h i ms’ en y and exi . They also emphasize ha he numbe o i ms se es as
a c i ical p opaga ion mechanism o agg ega e echnology shocks.
2
This esul con as s wi h o he models ha inco po a e labo ma ke ic ions and p edic a dec ease in employmen ollowing a
echnology shock.
3
Fu he mo e, hey ob ain he same esul by es ablishing a model ha assumes a Leon ie unc ion wi h habi o ma ion in
consump ion, e en in he absence o p ice igidi y. This indica es ha employmen is coun e cyclical in esponse o a posi i e
echnology shock. This phenomenon seems o be consis en in o he coun ies as well.
Economies 2024,12, 303 17 o 18
4
Mo eo e , echnology shock yields a dec ease in ou pu when he deg ee o complemen a i y is mo e subs an ial. They sugges
ha i he deg ee o subs i u ion be ween domes ic and o eign p oduc s is low, i becomes challenging o subs i u e o eign
p oduc s e en i he p oduc ion inc eases due o he inc eased p oduc i i y o domes ic p oduc s. In his si ua ion, hey ha e no
choice bu o accep un a o able e ms o ade o ma ke clea ing, which can cause a dec ease in employmen . Al hough hey
succeed in inding a nega i e ela ionship, he ac ha employmen is coun e -cyclical implies ha echnology imp o emen is
no longe he main d i e o luc ua ions.
5See he Supplemen a y Ma e ial o a mo e comp ehensi e de i a ion o he log-linea ized equa ions u ilized in his model.
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