Job Insecurity, Reallocation and Technological Innovation in a Self-Fulfilling Prophecy

If workers anticipate a technological innovation, some workers may decide to quit their job and retrain themselves to acquire the skills which are needed by this new technology. However, this may facilitate the innovation and make it a self-fulfilling prophecy. This self-fulfilling mechanism is reinforced if the anticipated innovation causes job insecurity for workers who do not retrain themselves and keep their current job, but realize that the innovation may make their job obsolete. If these workers engage in precautionary saving and cut their consumption expenditures, aggregate output contracts. This gives the other workers an extra incentive to quit their job and acquire new skills, and therefore facilitates even more the innovation which consumers were worried about. This paper formalizes this idea. It also provides an illustration of how a first-order Taylor-approximation of the Euler equation yields an effect of precautionary saving.