Question

Explain the effects of the introduction of labor-saving technological change in the long-run?

Answer 1

When there is labor-saving technology, it means that the ratio of the marginal productivity of capital and marginal productivity of labor increases. This means that the same level of output is produced using more capital than labor. This is because, in labor-saving technological progress, capital is more productive than labor.

Thus we can see from the explanation above that, labor-saving technological progress will displace laborers for capital in the economy. In the long run, this will result in unemployment (specifically structural unemployment). This will also create income inequality in the long run and increase the gap between the standards of living of different income earners.