New technology and labour Markets: Entrants, outsourcing and matching

The impact of new technology (ICT) on labour markets and welfare is analyzed in a model of matching. First, ICT lowers cost and speed of market access, thus reducing frictions in matching a searching worker to an opportunity. It raises output and lowers the cost of entry for a new firm. The rise in scale of aggregate employment raises productivity. Second, since the net effect of ICT raises the probability of a successful search by workers relative to a successful search by firms, workers share of the match surplus rises. Third, it induces more learning and innovation. Fourth, ICTs allows hitherto excluded segments to access new networks. This reduces the ability of members of an existing network to extract the entire surplus from a new entrant. Finally, it encourages cumulative improvements in technology and skills. More labour-using technological progress is induced. Multiple equilibria are possible, however, due to endogenous choice of training and technology. Therefore investment in training and technology may be at less than socially optimal levels. Policy implications follow.