Is labor-saving technological change efficient when labor market frictions arise? Does it exacerbate them? This paper presents a growth model with R&D and two types of technological change: labor-saving technological change, which reduces the labor share (the output elasticity of labor), and labor-complementary, which increases it. The paper presents two kinds of friction in the labor market: unemployment and dual labor markets. When there are dual labor markets, the marginal product of labor and the wages are higher in the “good-jobs sector” than in the “bad-jobs sector,” involving an inefficiently low amount of labor allocated to the good-jobs sector. Labor-saving technological change exacerbates the source of inefficiency in the labor market. It raises unemployment and destroys jobs in the good-jobs sector, generating negative external effects in the labor market. Consequently, investment in labor-saving technological change is inefficiently large and should be taxed. The results regarding labor-complementary technological change are the opposite.
JEL: D60, E24, J31, J50, J60, H21, H23, O30, O41.