Working Paper No. 02-11

Economic Growth and Business Cycles: The Labor Supply Decision with Two Types of Technological Progress
Philip E. Graves
September 2002

ABSTRACT

An informal model is described that leads to multiple macroeconomic equilibria as a consequence of random variation in the relative amounts of technological change for new and existing goods. A central observation is that the rate of introduction and market penetration of new goods vis-a-vis technological advance for existing goods importantly affects the labor supply decision. A relatively rapid influx of new goods will generally increase labor supply, while relatively more technological advance for existing goods will reduce labor supply to the market. Short run variations in the relative importance of the two types of technological change are seen to imply unpredictable business cycle behavior of the type we observe. National income accounting implications are discussed.

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