Fast and Slow Technological Transitions

Abstract

Do economies adjust slowly to certain technological innovations and more rapidly to others? We argue that the adjustment is slower when innovations mainly affect production activities that intensively use more specific skills. The reason is that the adjustment is driven more by the slow entry of younger generations of workers who invest in the skills that became more valuable and less by the relatively fast reallocation of older workers whose skills must be transferred across activities. We build an overlapping generations model of technological transitions that exhibits these features, motivated by new evidence documenting differences in how the U.S. labor market adjusted to two major technological innovations: Electricity in the early 20th century, and late 20th century advances in Information & Communications technologies (ICT). Our theoretical analysis yields a novel q -theory representation of equilibrium dynamics linking skill differences across generations to lifetime wage differentials ( q ). This allows us to sharply characterize when technological transitions are faster and, in particular, explain why the adjustment to ICT, but not Electricity, relied entirely on the slow entry of younger generations.