In: Economics
What happens to output per worker in the short term and long term if the amount of labor increases (L upwards arrow) in the basic Romer model ? (Your answer should compare the output to what it would have been on its prior trajectory.) Briefly explain the economic intuition.
Romer model explain the increase in the long run growth of
output per worker with respect to the technological progress. The
technical change will determine the demand for labour in the
market. Paul Romer emphasis that the firms are following
monopolistically competitive market system and this will help to
attain a monopoly power within the firms and cooperation among the
industry. This market system will help to develop new technologies
within the firms which will exclude from others usage.
According to Romer the increase in labour supply will increase the
level of existing knowledge and increase the growth rate. Initial
stock of ideas, research and productivity were depends on the level
of working population. The increase in labour in both short run and
long run will increase the output per worker through high level of
research and introduction of new technologies in the production
sector. Romer explain that the steady state growth rate of output
per worker will equates the steady state growth rate of
technology.