Labor‐eliminating technical change in a developing economy

• Author: John Gilbert,Reza Oladi
• DOI: http://doi.org/10.1111/ijet.12263
• Published date: 01 March 2021
• Date: 01 March 2021

Int J Econ Theory. 2021;17:88–100.wileyonlinelibrary.com/journal/ijet88

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© 2020 IAET

DOI: 10.1111/ijet.12263

ORIGINAL ARTICLE

Labor‐eliminating technical change in a

developing economy

John Gilbert

1

|Reza Oladi

2

1

Department of Economics & Finance,

Utah State University, Logan, Utah

2

Department of Applied Economics,

Utah State University, Logan, Utah

Correspondence

John Gilbert, Department of Economics &

Finance, Utah State University, 3565 Old

Main Hill, Logan, UT 84322‐3565, USA.

Email: jgilbert@usu.edu

Abstract

Developing countries face significant challenges

arising from automation. While the trade theory lit-

erature has tended to focus on factor‐neutral and

factor‐augmenting technical change, automation

processes suggest another form of technical change is

relevant: factor‐eliminating. We explore the impact of

a labor‐eliminating technical change in the context

of a small developing economy. Unlike labor‐

augmenting technical changes, labor‐eliminating

technical changes are not necessarily cost‐reducing,

and thus will not necessarily be adopted. A manu-

facturing wage held artificially higher than at the

market‐clearing level, as in the Harris–Todaro fra-

mework, increases the incentive to automate. We

establish the conditions under which firms will adopt

a labor‐eliminating technology, and describe the re-

sulting changes in equilibrium outcomes. Under

plausible circumstances, automation can actually

lower output, and may raise both the rate and level of

unemployment. Immiserizing growth becomes a

possibility, and can be tied directly to the underlying

wage distortion.

KEYWORDS

automation, technical change, urban unemployment

JEL CLASSIFICATION

F01