Does Productivity Growth Threaten Employment?

Is productivity growth inimical to employment? Canonical economic theory says no, but much recent economic theory says ‘maybe’ — that is, rapid advances in machine capabilities may curtail aggregate labor demand as technology increasingly encroaches on human job tasks. We explore the relationship between productivity growth and employment using countryand industry-level data for 19 countries over 35+ years. Consistent with both the popular narrative and the Baumol hypothesis, we find that industry-level employment robustly falls as industry productivity rises, implying that technically progressive sectors tend to shrink. Simultaneously, we show that country-level employment generally grows as aggregate productivity rises. Because sectoral productivity growth raises incomes, consumption, and hence aggregate employment, a plausible reconciliation of these results — confirmed by our analysis — is that the negative own-industry employment effect of rising productivity is outweighed by positive spillovers to the rest of the economy. Despite the relative neutrality of productivity growth for aggregate labor demand, we estimate that rapid productivity growth in primary and secondary industries has generated a substantial reallocation of workers into tertiary services. Because these services have a comparatively bimodal skill distribution of employment, the ensuing sectoral shifts have tended to ‘polarize’ labor demand. Yet, the skew has been far stronger in favor of highthan low-skill employment. In net, the sectoral bias of rising productivity has not diminished aggregate labor demand but has yielded skill-biased demand shifts. 1 Autor: MIT Department of Economics, Cambridge, MA 02142 ([email protected]); Salomons: Utrecht University School of Economics, 3584 EC Utrecht, The Netherlands ([email protected]). Paper prepared for the ECB Forum on Central Banking, June 2017. The authors thank Daron Acemoglu, James Bessen, and Maarten Goos for valuable suggestions.