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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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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2007.00449.x
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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. 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, vol. 40(3), pages 349-364, June.
  2. Jean-Baptiste Michau, 2009. "Unemployment Insurance and Cultural Transmission: Theory and Application to European Unemployment," CEP Discussion Papers dp0936, Centre for Economic Performance, LSE.
  3. Luca Zamparelli & Francesco Vona, 2010. "Centralized Wage Setting and Labor Market Policies: the Nordic Model Case," Working Papers CELEG 1005, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  4. Régis Barnichon & Andrew Figura, 2013. "Declining labor force attachment and downward trends in unemployment and participation," Economics Working Papers 1397, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Luciano Boggio & Vincenzo Dall'Aglio & Marco Magnani, 2009. "On Labour Shares in Recent Decades: A Survey," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq0957, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  6. M. Magnani, 2009. "Labor share dynamics: a survey of the theory," Economics Department Working Papers 2009-EP07, Department of Economics, Parma University (Italy).
  7. Georg Duernecker, 2008. "Technology Adoption, Turbulence and the Dynamics of Unemployment," Economics Working Papers ECO2008/10, European University Institute.
  8. 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).
  9. Jean-Baptiste Michau, 2013. "Creative Destruction with On-the-Job Search," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 691-707, October.
  10. Barnichon, Regis & Figura, Andrew, 2013. "Declining Labor Force Attachment and Downward Trends in Unemployment and Participation," Finance and Economics Discussion Series 2013-88, Board of Governors of the Federal Reserve System (U.S.).
  11. Thomas Gries & Stefan Jungblut & Tim Krieger & Henning Meier, 2009. "Statutory Retirement Age and Lifelong Learning," Working Papers CIE 9, University of Paderborn, CIE Center for International Economics.
  12. Thomas Gries & Stefan Jungblut & Tim Krieger & Henning Meier, 2009. "Statutory Retirement Age and Lifelong Learning," Working Papers 9, University of Paderborn, CIE Center for International Economics.
  13. Munich, Daniel & Svejnar, Jan, 2009. "Unemployment and Worker-Firm Matching Theory and Evidence from East and West Europe," Policy Research Working Paper Series 4810, The World Bank.
  14. Gonzalo Castex & Evgenia Dechter, 2013. "The Changing Roles of Education and Ability in Wage Determination," Working Papers Central Bank of Chile 704, Central Bank of Chile.

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