TECHNOLOGY CHOICE - THE OUTPUT AND EMPLOYMENT TRADEOFF

Suppose, unlike the endogenous growth literature, that technological i nnovation may actually create structural problems. If capital and labo r inputs of specific skill levels are complementary, and new technolog y changes the skill mix needs, then this mismatch may create underempl oyment or unemployment. High-tech investment maximizes output but at t he expense of unemployment of unskilled workers; lower-tech investment results in smaller unskilled labor unemployment, but a smaller increa se in output (or underemployment of skilled labor). A policy solution for this tradeoff is to allocate investment between physical capital a nd human capital in the right proportions to ensure both maximum outpu t and full employment.