Worth: Mankiw Economics 5e 208 PART I11 Growth Theory: The Economy in the Very Long Run whether we have oversimplified matters. In the last section, we examine a new set of theories, called endogenous growth theories, that hope to explain the technological progress that the Solow model takes as exogenous 8-1 Technological Progress in the solow model ar, our presentation of the Solow model has assumed an unchanging rela- tionship between the inputs of capital and labor and the output of goods and ser- vices. Yet the model can be modified to include exogenous technological progress, which over time expands society's ability to produce The Efficiency of Labor To incorporate technological progress, we must return to the production func- tion that relates total capital K and total labor L to total output Y. Thus far, the production function has been F(K, L We now write the ction function as Y=F(K, where E is a new(and somewhat abstract) variable called the efficiency of labor. The efficiency of labor is meant to reflect society's knowledge about pro- duction methods: as the available technology improves, the efficiency of labor rises. For instance, the efficiency of labor rose when assembly-line production transformed manufacturing in the early twentieth century, and it rose again when computerization was introduced in the the late twentieth century. The ef- ficiency of labor also rises when there are improvements in the health, education, or skills of the labor force The term L X E measures the number of effective workers. It takes into account the number of workers L and the efficiency of each worker E. This new produc tion function states that total output Y depends on the number of units of capital K and on the number of effective workers L X E Increases in the efficiency of labor e are in effect. like increases in the labor force L. The simplest assumption about technological progress is that it causes the effi ciency of labor e to grow at some constant rate g. For example, if g=0.02, then each unit of labor becomes 2 percent more efficient each year: output increases as if the labor force had increased by an additional 2 percent. This form of tech nological progress is called labor augmenting, and g is called the rate of labor augmenting technological progress. Because the labor force L is growing at rate n,and the efficiency of each unit of labor E is growing at rate g, the number of effective workers LX E is growing at rate n+g. User JoENA: Job EFFo1424: 6264_ ch08: Pg 208: 27097#/eps at 100s ed,Feb13,20029:584MUser JOEWA:Job EFF01424:6264_ch08:Pg 208:27097#/eps at 100% *27097* Wed, Feb 13, 2002 9:58 AM whether we have oversimplified matters. In the last section, we examine a new set of theories, called endogenous growth theories, that hope to explain the technological progress that the Solow model takes as exogenous. 8-1 Technological Progress in the Solow Model So far, our presentation of the Solow model has assumed an unchanging rela￾tionship between the inputs of capital and labor and the output of goods and ser￾vices. Yet the model can be modified to include exogenous technological progress, which over time expands society’s ability to produce. The Efficiency of Labor To incorporate technological progress, we must return to the production func￾tion that relates total capital K and total labor L to total output Y.Thus far, the production function has been Y = F(K, L). We now write the production function as Y = F(K, L × E), where E is a new (and somewhat abstract) variable called the efficiency of labor.The efficiency of labor is meant to reflect society’s knowledge about pro￾duction methods: as the available technology improves, the efficiency of labor rises. For instance, the efficiency of labor rose when assembly-line production transformed manufacturing in the early twentieth century, and it rose again when computerization was introduced in the the late twentieth century. The ef- ficiency of labor also rises when there are improvements in the health, education, or skills of the labor force. The term L × E measures the number of effective workers. It takes into account the number of workers L and the efficiency of each worker E.This new produc￾tion function states that total output Y depends on the number of units of capital K and on the number of effective workers L × E. Increases in the efficiency of labor E are, in effect, like increases in the labor force L. The simplest assumption about technological progress is that it causes the effi- ciency of labor E to grow at some constant rate g. For example, if g = 0.02, then each unit of labor becomes 2 percent more efficient each year: output increases as if the labor force had increased by an additional 2 percent.This form of tech￾nological progress is called labor augmenting, and g is called the rate of labor￾augmenting technological progress. Because the labor force L is growing at rate n, and the efficiency of each unit of labor E is growing at rate g, the number of effective workers L × E is growing at rate n + g. 208 | PART III Growth Theory: The Economy in the Very Long Run