Answer to Question #143952 in Macroeconomics for Tanvir Alam

Question

Consider an economy with technological progress but
without population growth that is in steady-state. Now suppose there is a one-time
jump in the number of workers.
(a) At the time of the jump, does output per unit of effective labor rise, fall or stay
constant.
(b) After the initial change (if any) in output per unit of effective labor when the new
workers appear, is there any further change in output per unit of effective labor? If
so, does it rise or fall? Why?
(c) Once the economy reaches its new steady-state, is output per unit of effective labor
higher, lower or the same as it was before the new workers appeared? Why?

Answer 1

a) At the time of the jump, output per unit of effective labour instantly falls as well as capital per unit of effective labour does. While the capital stock is unable to change instantly and technological progress does not alter other than before capital must decrease, the same case less capital per effective worker available and output has to be shared by more effective workers.

b) The one-time jump of labour can be described as a situation for the economy that does not matter in the long run. The decrease in capital leads to a situation where actual investment exceeds break -even -investment. Firms therefore need to pay less for their capital than the capital yield for them which makes investment lucrative.

c) A jump in labour does not alter any growth rate, savings rate, or production function but simply affect an initial condition. Initial condition of capital, output and labour do not matter, it is clear that the economy moves to its steady-state again.