Economic Growth and Business Cycles: The Labor Supply Decision with Two Types of Technological Progress

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. The novel observation is that the rate of introduction and market penetration of new goods (sometimes called product innovation) vis-à-vis technological advance for existing goods (sometimes called process innovation) 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. These impacts are seen to provide insights into Rostow’s stages of growth. 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. The welfare implications of national income accounting that fails to consider changes in leisure are discussed.