Short-Run Pain, Long-Run Gain? Recessions and Technological Transformation

Abstract

Recent empirical evidence suggests that skill-biased technological change that shifts labor demand towards non-routine jobs has accelerated during the Great Recession. We analyze the interaction between the gradual process of transition towards a skill intensive technology and business cycles in a standard neoclassical growth framework. In the model, periods of depressed economic activity are used by firms to deeply reorganize production and by routine workers to acquire new skills due to low opportunity costs. As a result, additional resources are diverted from production, amplifying the effect of a negative TFP shock. At the same time, recessions speed up technological transformation. For a reasonable parametrization, the model is able to match both the long-run trend in the routine employment share and the dramatic impact of the Great Recession on such jobs.

Keywords: job polarization, routine-biased technical change, business cycle, human capital investment, upskilling, Great Recession

JEL Classification: E24, E32, O33, J24