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1 Introduction TECHNOLOGY AND AMERICAN ECONOMIC WELFARE Technological change transforms the production of goods and services and improves the efficiency of production processes. It also allows the production of entirely new goods and services. Since the beginnings of American industrialization, such change has been a central component of U.S. economic growth, growth characterized by the creation of new industries and the transformation of older ones through innovations in products and processes. One of the results of these innovations has been increased productivity that is, greater output per unit of input which has been largely responsible for growth in U.S. income per person during most of this century. Such growth in turn has contributed to higher living standards for Americans and shorter workweeks (Abramovitz, 1956; Denison, 1962; Solow, 19571. The contribution made by technological advances to growth in income per person has increased during the past 100 years (Abramovitz and David, 1973; Temin, 19751; that contribution, as well as the contribution of new technology to overall U.S. economic advance, is likely to increase still further as the United States becomes more closely linked to the global economy. Technological change in production processes frequently reduces the amount of labor and other resources needed to produce a unit of output; these reductions lower both the costs of production and the labor requirements for a fixed output level. If a reduced demand for labor were the only effect of technological change on employment, policymakers 16

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INTROD UCTION 17 addressing the problem of maintaining U.S. economic welfare would simply have to balance the contributions of technological change against the costs of higher unemployment. Yet technological change has other important effects that historically have enabled society to achieve greater prosperity without sacrificing employment. By reducing the costs of production and thereby lowering the price of a particular good in a competitive market, technological change in production processes frequently leads to increased demand for that good; greater output demand results in increased production, which requires more labor, and offsets the effects of reductions in the amount of labor required per unit of output. Even if the demand for a good whose production process has been transformed does not increase significantly when the price of the good is lowered, benefits still accrue because consumers can use the savings from price reductions to purchase other goods and services. In the aggregate, therefore, employment often expands. Moreover, when technological change results in the develop- ment and production of new products, employment grows in the indus- tries that serve the markets for these goods, as well as in the industries supplying inputs to them. Historically and, we believe, for the foreseeable future, any laborsaving impact of technological change on aggregate employment has been and will continue to be outweighed by the beneficial employment effects of the expansion in total output that generally occurs. Total employment within an economy is determined by a great many influences, of which technological change is only one and far from the most important. The level of total employment is influenced by the rate of economic growth, operating in conjunction with growth in the labor supply; by the level of real (inflation-adjusted) wages; by business cycle fluctuations; and by occasional "shocks" to the economic system for example, the massive oil price increases of 1973 and 1979. We have defined our task as that of analyzing the contribution of technological change to employment and unemployment. Because technological change plays such a limited role in determining total employment, its employment impacts in this area are primarily sectoral, and those impacts are affected only indirectly by aggregate economic conditions. We therefore regard the design of macroeconomic policies aimed at achieving high levels of aggregate demand and employment as outside the panel's charge. In recent years, international trade has become an important force within the U.S. economy. Consequently, international trade flows inter- act with technological change to affect U.S. employment. Some of the implications of this interaction for economic policy and employment in the U.S. economy are discussed later in this report (see Chapters 2 and 34. A detailed analysis of international trade issues and recommendations for international trade policy, however, would have drawn us far from our

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18 TECHNOLOG Y AND EMPLO YMENT primary focus the impact of technological change on employment. We therefore devote little attention to international trade policies. Much of our analysis focuses on the employment effects of technolog- ical change in particular industries or sectors. As technological change and other factors alter the structure of the economy, unemployment can and will result in some areas, while expanding employment opportunities appear elsewhere. Our analysis and policy prescriptions highlight ways of facilitating the movement of workers from sectors or occupations in which labor demand is declining to areas in which it is growing. Our principal finding may be succinctly stated: Technological change is an essential component of a dynamic, expanding economy. The modern U.S. economic system, in which international trade plays an increasingly important role, must generate and adopt advanced technologies rapidly in both the manufacturing and nonmanu- facturing sectors if growth in employment and wages is to be maintained. Recent and prospective levels of technological change will not produce significant increases in total unemployment, although individuals will face painful and costly adjustments. Rather than producing mass unem- ployment, technological change will make its maximum contribution to higher living standards, wages, and employment levels if appropriate public and private policies are adopted to support the adjustment to new technologies. Technological change often involves difficult adjustments for firms and individuals. Workers must develop new skills and may be required to seek employment in different industries, occupations, or locations. In many cases, workers suffer severe financial losses as a result of permanent layoffs or plant closings. Managers also face serious challenges in evaluating and adopting new manufacturing and office technologies in an increasingly competitive global economy. In light of these realities, we recommend policies to help workers and firms adjust to technological change. Our recommendations propose new initiatives to aid displaced workers through job search assistance, basic skills training, retraining, and advance notice of plant shutdowns and large-scale permanent layoffs. These initiatives focus on the need for society as a whole, which benefits from technological change, to assist individuals who experience hardship as a result of it and to help them secure new jobs. We also discuss strategies to help firms adopt new technologies more rapidly. The alternative to rapid rates of technological change is stagnation in productivity growth and real wages. In foreign economies, technological change will be rapid for the foreseeable future; if the United States is to remain an industrial power capable of generating high-wage employment,

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INTRODUCTION 19 such change is indispensable (although other factors, e.g., capital forma- tion, also affect the international competitiveness of U.S. industry). In the end, the goals of increased high-wage employment and rapid rates of technological change are more than compatible; achieving the first goal depends on accomplishing the second. Technological change poses significant challenges to government policymakers, business, and labor, as well as to individual workers and managers. Although the United States remains a technological and eco- nomic leader, the performance of this economy in adopting new technol- ogies, achieving higher levels of productivity, and dealing with the adjustment of workers to technological change leaves much to be desired. The costs of continued suboptimal performance in these areas are not inconsequential: if business, labor, and government fail to develop appropriate adjustment policies, the technological dynamism and inter- national competitiveness of the U.S. economy will decline. WHOSE JOBS ARE AFFECTED BY TECHNOLOGICAL CHANGE? Total employment depends on the supply of and demand for labor. The labor supply is determined by demographic factors, which affect the number of entrants to the labor force each year, and by changes in the proportion of different population groups seeking employment (labor force participation rates). The demand for labor depends primarily on the rate of growth in total output and real wages, both of which can be affected by cyclical fluctuations, and on numerous other factors. Although technological change is of secondary importance in determin- ing total employment, it does affect one component of aggregate unem- ployment. "Structural" unemployment is unemployment of long duration that persists in the face of economic expansions. It stems from the dynamism of the economic system in which jobs are created and eliminated constantly, regardless of the state of aggregate or total demand (Leonard, 19861. Although the duration of either unemployment after job loss or job search after entry into the labor force is relatively short for most workers, others have great difficulty finding new jobs and thus may be unemployed for much longer periods. Our discussion of technological change and employment focuses on the effects of new technology on the employment of experienced workers and on job openings for those entering the labor force. For example, techno- logical change may contribute to unemployment among experienced workers because the jobs created by new technology are located far away from the areas with significant job losses; in addition, the new jobs that result from technological change may require skills that make them

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20 TECHNOLOG Y AND EMPLO YMENT difficult for displaced workers to fill. The evidence suggests that the adoption of new technologies by U.S. firms is a relatively modest contributor to permanent job loss in this economy, although precise distinctions among the causes of displacement are virtually impossible to make. There is, however, some reason to believe that technological change may play a role in other causes of experienced worker displace- ment. As we discuss later (see Chapters 2 and 3), much of the displace- ment of U.S. workers resulting from import competition reflects more rapid technological progress in other nations. Programs such as job search assistance and counseling, as well as retraining, are designed to help experienced displaced workers adjust to technological change and are potential means of reducing structural unemployment. Because there have been few evaluations of such pro- grams, however, there is little guidance for successful program planning and design. New initiatives in this area must incorporate substantial resources for experimentation and evaluation, as discussed in Chapters 7 and 8. As for labor force entrants (discussed in Chapters 3 and 5), our review of the evidence suggests that a strong foundation in basic skills will be indispensable to finding good jobs in the workplace of the future (see also the report of the COSEPUP Panel on Secondary School Education for the Changing Workplace, 1984~. Job openings for well-prepared entrants to the labor force should remain sufficient to absorb the projected smaller population of entrants in the future. TECHNOLOGICAL CHANGE AND EMPLOYMENT IN AN "OPEN" ECONOMY The U.S. economy of the 1980s is more "open" to international trade than the U.S. economy of the 1950s and 1960s; imports and exports affect a larger share of economic activity and employment. In such an environ- ment, productivity growth, which is influenced by technological change, is essential to maintaining higher real earnings and preserving U.S. jobs. Our discussion of the employment impacts of technological change is influenced by our recognition that within an open economy, growth in output and employment depends on productivity growth. How does technological change support growth in productivity, em- ployment, and output within an economy that is open to international trade? The answer lies in the interdependence of these factors, a key concept in explaining the analysis in this report. The process of techno- logical change, which is discussed in greater detail in Chapter 2, involves exploiting scientific and technical knowledge in the invention and inno- vation stages. Within the modern economic environment, the knowledge

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INTROD ACTION 21 that is the basis for commercial innovations need not be domestic in origin. U.S. firms have relied on discoveries made elsewhere in the world in developing new technologies, and U.S. basic research may underpin (and has underpinned) the technological advances of firms in other nations. The relative rates of development and adoption by U.S. and foreign industries of new process technologies affect the rates of growth in labor productivity in those industries and therefore can produce differences in labor costs among U.S. and foreign firms. To the extent that foreign firms develop and adopt new technologies more quickly than U.S. firms, the production costs of foreign producers will fall more rapidly. In the absence of other adjustments, these reductions in the production costs of foreign producers will decrease markets for U.S. firms and ultimately reduce jobs for U.S. workers within the affected industries. To remain competitive in the absence of technological advance and productivity growth in these industries, U.S. labor costs must be lowered relative to those of foreign producers. This can occur through direct reductions in wages or through reductions in the foreign exchange price of the U.S. dollar. Both of these alternatives shrink U.S. workers' incomes, relative to those of workers in other nations, and thereby contribute to stagnation in U.S. living standards. Thus, if U.S. firms fall behind foreign firms in rates of development and adoption of new technologies, the alternatives are not attractive U.S. workers must accept fewer jobs or lower earnings. Yet, if U.S. firms can consistently develop and adopt new technolo- gies more rapidly than foreign producers, the picture is quite different. The resultant higher productivity growth in U.S. industries will support lower production costs, which will enable U.S. workers to retain higher-wage jobs. Within the modern world economy, however, new knowledge and technologies developed within the United States are transferred to foreign competitors more quickly than they were in the past. Therefore, any technology-based advantages held by U.S. firms and workers over foreign firms and workers are likely to be more fleeting in the future. One key factor in sustaining American living standards, wages, and employment is continued public and private investment in the generation of new knowledge. U.S. firms also must advance from fundamental knowledge to commercial innovations more rapidly than in the past. The open character of the U.S. economy of the 1980s and 1990s means that the link between productivity and output growth will play a central role in determining wages and employment in U.S. manufacturing (and eventually in portions of the U.S. services sector, as this sector becomes increasingly involved in international trade). The changing nature of

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22 TECHNOLOGYAND EMPLOYMENT international competition has enhanced the importance of higher levels of skills within the employed work force. More highly skilled workers can adopt new technologies more quickly and adapt more easily to changing markets and competitive conditions. We see improvements in the skills of the employed work force as a major factor in preserving and strengthening high-skill, high-wage employment in the U.S. economy. ORGANIZATION OF THE REPORT Our report contains nine additional chapters. Chapter 2 describes the process of technological change, devoting particular attention to the adoption of new technologies and to the special problems of small firms in managing technological change and adoption. Chapter 3 discusses how technology, labor supply, and labor demand affect the impact of techno- logical change on employment in an open economy. Chapter 4 considers the impact of technological change on employment and wages, focusing on empirical studies of the sectoral employment effects of such change, and also discusses the impact of new technologies on job skill require- ments. The employment and economic status of entrants to the labor force and the employment prospects of women and minorities are discussed in Chapter 5. Chapter 6 examines the impacts of technology on the workplace, exploring the effects of technological change on the structure of the firm, the role of labor-management relations in managing these changes in the workplace and the challenges and opportunities in occupational health and safety that result from technological innovations. Chapter 7 discusses public and private policies that affect the adjustment of the economy and the labor force to technological change. Chapter 8 proposes several strategies for further research on technology, employment, and worker adjustment assistance programs and stresses the need to collect data on the diffusion of innovations and their effects on workers and the work- place. Chapter 9 contains the panel's findings, and Chapter 10 presents our policy recommendations. The panel did not reach definitive conclusions or findings in some areas of its charge. Because of a lack of data, for example, as well as our conclusion that technological change will have only a limited effect on regional growth in the future, we did not analyze in detail the regional economic impacts of technological change. Analysis of the effects of technology on the length of the working day was not pursued for similar reasons. The absence of a panel finding or policy recommendation should not be taken as evidence that the issue in question is unimportant or that it does not require further research and monitoring. In those cases in which an important issue could not be addressed for whatever

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INTROD UCTION 23 reasons we have noted the need for additional work. In other areas- for example, the evaluation of the effectiveness of retraining for dis- placed workers there is insufficient quantitative evidence for a factual finding. In these instances, we have provided a statement of our collective judgment based on the expertise of our panel members and on the research and analysis carried out by panel members, staff, and authors of commissioned papers during the past 18 months.