Embodied technological progress, heterogeneous multiworker firms, and unemployment

Abstract

This paper studies the impact of technological progress on unemployment in a search-matching model with heterogeneous multiworker firms. In the model, some firms continue to reap rewards from new technologies over time and contribute to job creation, while other firms obsolesce and reduce their employment. Thus, the model captures an endogenous change in the aggregate composition of firms (the firm-composition effect). Considering this effect along with the two canonical effects—the capitalization and creative-destruction effects—I examine the importance of each through a simulation. The results show that the firm-composition effect explains almost all the variation in unemployment in the model, mainly through shrinking the number of obsolescing firms relative to surviving firms and increasing the aggregate technology adoption rate when technology progresses rapidly.