Technological Change, the Labor market and the Stock Market

This paper presents a model in which a partially anticipated technology shock results, in the short run, in lower investment and higher unemployment. Because of the expectation of future lower proÞts, the market value of existing Þrms –and the wages they pay– decreases before the new (better) technology becomes available. When the new technology arrives, the market value of new Þrms rises, average wages increase, but endogenous gradual adoption results in temporary wage dispersion among identical workers. The model shows that the same factors that affect the rate of adoption of a new technology also inßuence the cross sectional dispersion of labor earnings among identical workers, and the market value of business Þrms. The predictions of the model seem to be broadly consistent with the U.S. experience of the last thirty years.