A Micro-Matching Foundation of Neutral Technical Progress

We develop a general two-sided micro-matching framework with heterogeneous workers and machines that permits a complete analysis of neutral technical progress commonly used in neoclassical production theory, without a priori restrictions on the functional forms of the production technology. We use the concept of “production core” to determine stable task assignments and the corresponding factor-return distributions, and then examine how these equilibrium outcomes respond to neutral technical progress pertaining to a particular worker or to all factors. Technical progress that is uniform in all factors will not alter equilibrium micro-matching. Technical progress of the labor-augmenting type may (i) cause a “turnover” by destroying existing stable task assignments and creating new stable task assignments, (ii) generate a factor-return redistribution similar to Harrod-neutral technical progress in neoclassical theory, and (iii) create “spillover” effects from the innovating worker to his/her potential matching machines and his/her directly and indirectly competing workers. The possibility of turnovers and the extent to which factor returns are redistributed depend on the value of the current matches, the extent of outside threats from latent technologies, and the size of technical progress. JEL Classification: D20, C71, O33.