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Does the Choice between Wage Inequality and Unemployment Affect Productivity Growth?

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  • Lutz G. Arnold

Abstract

We present a non-scale continuous-time overlapping-generations growth model that provides an explanation for why economies with relative wage rigidity feature higher unemployment, but not slower productivity growth, than economies with flexible wages. The compression of the wage distribution associated with relative wage rigidity slows down human capital accumulation and growth ceteris paribus. But unemployment among the low-skilled workers strengthens the incentives to invest in human capital and, hence, growth. The two effects are offsetting, and growth is independent of the prevailing degree of relative wage rigidity. This knife-edge result is robust with respect to some modifications of the model. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2006.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 7 (2006)
Issue (Month): (02)
Pages: 87-112

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Handle: RePEc:bla:germec:v:7:y:2006:i::p:87-112

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References

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  1. Huw Lloyd-Ellis & Joanne Roberts, 2000. "Twin Engines of Growth," Working Papers jorob-00-02, University of Toronto, Department of Economics.
  2. Huw Lloyd-Ellis, 1999. "Endogenous Technological Change and Wage Inequality," American Economic Review, American Economic Association, vol. 89(1), pages 47-77, March.
  3. Oded Galor & Omer Moav, 1998. "Ability Biased Technological Transition, Wage Inequality, and Economic Growth," Working Papers 98-14, Brown University, Department of Economics.
  4. C Bean & Christopher A. Pissarides, 1992. "Unemployment, Consumption and Growth," CEP Discussion Papers dp0100, Centre for Economic Performance, LSE.
  5. Hellwig, Martin F & Irmen, Andreas, 2001. "Wage Growth, Productivity Growth, and the Evolution of Employment," CEPR Discussion Papers 2927, C.E.P.R. Discussion Papers.
  6. Arnold, Lutz G., 2002. "On the growth effects of North-South trade: the role of labor market flexibility," Journal of International Economics, Elsevier, vol. 58(2), pages 451-466, December.
  7. Schaik, A.B.T.M. van & Groot, H.L.F. de, 1995. "Unemployment and endogenous growth," Discussion Paper 1995-75, Tilburg University, Center for Economic Research.
  8. Peretto, Pietro F., 1998. "Market Power, Growth and Unemployment," Working Papers 98-16, Duke University, Department of Economics.
  9. Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1.
  10. David K. Backus & Patrick J. Kehoe & Timothy J. Kehoe, 1992. "In search of scale effects in trade and growth," Staff Report 152, Federal Reserve Bank of Minneapolis.
  11. Arnold, Lutz G., 1998. "Growth, Welfare, and Trade in an Integrated Model of Human-Capital Accumulation and Research," Journal of Macroeconomics, Elsevier, vol. 20(1), pages 81-105, January.
  12. Palokangas, Tapio, 1996. "Endogenous growth and collective bargaining," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 925-944, May.
  13. Gould, Eric D & Moav, Omer & Weinberg, Bruce A, 2001. " Precautionary Demand for Education, Inequality, and Technological Progress," Journal of Economic Growth, Springer, vol. 6(4), pages 285-315, December.
  14. Arnold, Lutz G., 2000. "Endogenous growth with physical capital, human capital and product variety: A comment," European Economic Review, Elsevier, vol. 44(8), pages 1599-1605, August.
  15. Lutz G. Arnold, 2002. "On the Effectiveness of Growth-Enhancing Policies in a Model of Growth Without Scale Effects," German Economic Review, Verein für Socialpolitik, vol. 3(3), pages 339-346, 08.
  16. Eicher, Theo S, 1996. "Interaction between Endogenous Human Capital and Technological Change," Review of Economic Studies, Wiley Blackwell, vol. 63(1), pages 127-44, January.
  17. Blackburn, Keith & Hung, Victor T. Y. & Pozzolo, Alberto F., 2000. "Research, Development and Human Capital Accumulation," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 189-206, April.
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Cited by:
  1. Christiane Clemens, 2009. "Stochastic Growth and Factor Income Risk," German Economic Review, Verein für Socialpolitik, vol. 10, pages 422-447, November.

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