When Does Labor Scarcity Encourage Innovation? Strongly Labor Saving Technological Progress

This paper studies the conditions under which the scarcity of a factor (in particular, labor) encourages technological progress and technology adoption. In standard endogenous growth models, which feature a strong scale e¤ect, an increase in the supply of labor encourages technological progress. In contrast, the famous Habakkuk hypothesis in economic history claims that technological progress was more rapid in 19th-century United States than in Britain because of labor scarcity in the former country. Similar ideas are often suggested as possible reasons for why high wages might have encouraged rapid adoption of certain technologies in continental Europe over the past several decades. I present a general framework for the analysis of these questions. I de…ne the concept of strongly labor saving technological change as follows. Suppose that the aggregate production function of the economy is supermodular in a vector of technologies denoted by . Technological progress is strongly labor saving if the production function exhibits decreasing di¤erences in and labor. Conversely, technological progress is strongly labor complementary if the production function exhibits increasing di¤erences in and labor. The main result of the paper shows that labor scarcity will encourage technological advances if technological progress is strongly labor saving. In contrast, labor scarcity will discourage technological advances if technological progress is strongly labor complementary. I provide examples of environments in which technological progress can be strongly labor saving and also show that such a result is not possible in certain canonical models. These results clarify the conditions under which labor scarcity and high wages encourage technological progress and the reason why such results were obtained or conjectured in certain settings but do not always apply in many models used in the growth literature. JEL Classi…cation: O30, O31, O33, C65.