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Technology—Policy Interaction in Frictional Labour-Markets

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  • Andreas Hornstein
  • Per Krusell
  • Giovanni L. Violante

Abstract

Does capital-embodied technological change play an important role in shaping labour-market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labour demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labour-market regulations (unemployment benefits, payroll taxes, and firing costs) exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labour-market experience relative to that of the U.S.: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labour share. A calibrated version of our model suggests that this technology—policy interaction could explain a sizeable fraction of the observed differences between the U.S. and Europe. Copyright 2007, Wiley-Blackwell.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 74 (2007)
Issue (Month): 4 ()
Pages: 1089-1124

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Handle: RePEc:oup:restud:v:74:y:2007:i:4:p:1089-1124

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Cited by:
  1. Jean-Baptiste Michau, 2009. "Unemployment Insurance and Cultural Transmission: Theory and Application to European Unemployment," CEP Discussion Papers, Centre for Economic Performance, LSE dp0936, Centre for Economic Performance, LSE.
  2. Munich, Daniel & Svejnar, Jan, 2009. "Unemployment and Worker-Firm Matching Theory and Evidence from East and West Europe," Policy Research Working Paper Series, The World Bank 4810, The World Bank.
  3. Francesco Vona & Luca Zamparelli, 2010. "Centralized Wage Setting and Labor Market Policies: the Nordic Model Case," Working Papers, Sapienza University of Rome, DISS 5/10, Sapienza University of Rome, DISS.
  4. Barnichon, Regis & Figura, Andrew, 2013. "Declining Labor Force Attachment and Downward Trends in Unemployment and Participation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-88, Board of Governors of the Federal Reserve System (U.S.).
  5. Jean-Baptiste Michau, 2007. "Creative destruction with on-the-job search," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19658, London School of Economics and Political Science, LSE Library.
  6. Régis Barnichon & Andrew Figura, 2013. "Declining labor force attachment and downward trends in unemployment and participation," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1397, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Francesco Vona & Luca Zamparelli, 2014. "Centralized Wage Setting and Active Labor Market Policies in Frictional Labor Markets: The Nordic Case," Eastern Economic Journal, Palgrave Macmillan, Palgrave Macmillan, vol. 40(3), pages 349-364, June.
  8. Dürnecker, Georg, 2011. "Technology Adoption, Turbulence and the Dynamics of Unemployment," Working Papers, University of Mannheim, Department of Economics 11-2, University of Mannheim, Department of Economics.
  9. Langot, François & Moreno-Galbis, Eva, 2008. "Does the Growth Process Discriminate against Older Workers?," IZA Discussion Papers 3841, Institute for the Study of Labor (IZA).
  10. Luciano BOGGIO & Vincenzo DALL’AGLIO & Marco MAGNANI, 2010. "On Labour Shares in Recent Decades: A Survey," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 118(3), pages 283-333.
  11. Thomas Gries & Stefan Jungblut & Tim Krieger & Henning Meier, 2009. "Statutory Retirement Age and Lifelong Learning," Working Papers CIE, University of Paderborn, CIE Center for International Economics 9, University of Paderborn, CIE Center for International Economics.
  12. Gonzalo Castex & Evgenia Dechter, 2013. "The Changing Roles of Education and Ability in Wage Determination," Working Papers Central Bank of Chile, Central Bank of Chile 704, Central Bank of Chile.
  13. M. Magnani, 2009. "Labor share dynamics: a survey of the theory," Economics Department Working Papers, Department of Economics, Parma University (Italy) 2009-EP07, Department of Economics, Parma University (Italy).

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