An increase in technology that enhances labor productivity will likely result in:

Question

BlackTom AI · Accepted Answer

When evaluating the impact of a technological improvement that boosts labor productivity, several outcomes are possible, but the most direct and commonly taught effect is on both employment and wages via higher marginal product of labor.
Option 1: 'a decrease in labor employment and an increase in the wage rate.' A productivity improvement typically raises the marginal product of labor, which tends to increase both the demand for labor (employment) and the wage rate. A decrease in employment contradicts this mechanism, making this option inconsistent with standard theory.
Option 2: 'a decrease in labor employment and a decrease in the wage rate.' Both employment and wages would tend to rise or at least not fall together when productivity improves. This option suggests a simultaneous decline in both, which does not align with the idea that workers become more productive and valuable, reducing the likelihood of lower wages and employment.
Option 3: 'an increase in labor employment and a decrease in the wage rate.' While employment might rise with higher demand for labor, the wage rate is likely to move with the productivity signal. A decrease in wages accompanying higher employment implies a weaker linkage between productivity and compensation, which contradicts the standard result that higher productivity raises workers’ marginal product and wages.
Option 4: 'an increase in labor employment and an increase in the wage rate.' This aligns with the core concept: technology that raises labor productivity increases the marginal product of labor, boosting both the demand for labor (more employment) and the wage rate as firms are willing to pay more for productive workers.
Option 5: 'employers using less labor and more capital while the wage effect is unknown.' While technology can shift toward more capital usage (capital-labor substitution) in some scenarios, the typical short-run interpretation of a productivity-enhancing technology is that workers become more productive, which tends to raise both employment and wages, making this option less directly correct in the usual framing.
In summary, the combination of higher employment and higher wages (Option 4) follows from the intuition that greater labor productivity raises the marginal product of labor and thus the value of hiring workers at prevailing or higher wage rates.

ECON 4001.01 SP2025 (19496) Week 13 quiz

An increase in technology that enhances labor productivity will likely result in:

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