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The Replacement Problem In Frictional Economies: A Near-Equivalence Result

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  • Andreas Hornstein

    (Federal Reserve Bank of Richmond.)

  • Per Krusell

    (Princeton University and Institute for International Economic Studies.)

  • Giovanni L. Violante

    (New York University)

Abstract

We examine how technological change affects wage inequality and unemployment in a cali-brated model of matching frictions in the labor market. We distinguish between two polar cases studied in the literature: a "creative destruction" economy, where new machines enter chiefly through new matches and an "upgrading" economy, where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light of the fact that, in the model calibrated to the US economy, both unemployment and vacancy durations are very short, i.e., the matching frictions are quantitatively minor. Hence, the equilibrium allocations of the model are remarkably close to those of a frictionless version of our economy where firms are indifferent between upgrading and creative destruction, and where every worker is paid the same market-clearing wage. These results are robust to the inclusion of machine-specific or match-specific heterogeneity into the benchmark model. (JEL: J41, J64, O33) Copyright (c) 2005 by the European Economic Association.

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Bibliographic Info

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 3 (2005)
Issue (Month): 5 (09)
Pages: 1007-1057

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Handle: RePEc:tpr:jeurec:v:3:y:2005:i:5:p:1007-1057

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  1. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report 239, Federal Reserve Bank of Minneapolis.
  2. Andreas Hornstein & Per Krusell, 1996. "Can Technology Improvements Cause Productivity Slowdowns?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 209-276 National Bureau of Economic Research, Inc.
  3. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
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  5. Christopher A. Pissarides & Giovanna Vallanti, 2004. "Productivity Growth and Employment: Theory and Panel Estimates," CEP Discussion Papers dp0663, Centre for Economic Performance, LSE.
  6. Barbara Petrongolo & Christopher A. Pissarides, 2000. "Looking Into the Black Box: A Survey of the Matching Function," CEP Discussion Papers dp0470, Centre for Economic Performance, LSE.
  7. Bartel, Ann P & Sicherman, Nachum, 1993. "Technological Change and Retirement Decisions of Older Workers," Journal of Labor Economics, University of Chicago Press, vol. 11(1), pages 162-83, January.
  8. Akerlof, George A, 1969. "Structural Unemployment in a Neoclassical Framework," Journal of Political Economy, University of Chicago Press, vol. 77(3), pages 399-407, May/June.
  9. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
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  11. Ridder, Geert & van den Berg, Gerard J, 2003. "Measuring Labour Market Frictions: A Cross-Country Comparison," CEPR Discussion Papers 3978, C.E.P.R. Discussion Papers.
  12. Aghion, Philippe & Howitt, Peter, 1994. "Growth and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 477-94, July.
  13. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  14. Dale T. Mortensen & Christopher A. Pissarides, 1998. "Technological Progress, Job Creation and Job Destruction," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 733-753, October.
  15. Robert E. Hall, 2003. "Wage Determination and Employment Fluctuations," NBER Working Papers 9967, National Bureau of Economic Research, Inc.
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  17. King, Ian & Welling, Linda, 1995. "Search, unemployment, and growth," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 499-507, June.
  18. Dale W. Jorgenson, 2001. "Information Technology and the U.S. Economy," American Economic Review, American Economic Association, vol. 91(1), pages 1-32, March.
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  20. Boyan Jovanovic, 1998. "Vintage Capital and Inequality," NBER Working Papers 6416, National Bureau of Economic Research, Inc.
  21. Dale W. Jorgenson, 2001. "Information Technology and the U. S. Economy," Harvard Institute of Economic Research Working Papers 1911, Harvard - Institute of Economic Research.
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  24. Andreas Hornstein & GianLuca Violante & Per Krusell, 2006. "Frictional Wage Inequality: A Puzzle?," 2006 Meeting Papers 7, Society for Economic Dynamics.
  25. Jovanovic, B., 1998. "Vintage Capital and Equality," Working Papers 98-16, C.V. Starr Center for Applied Economics, New York University.
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Cited by:
  1. Fabio Canova & David Lopez-Salido & Claudio Michelacci, 2006. "Schumpeterian technology shocks," Economics Working Papers 1012, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2007.
  2. James S. Costain & Michael Reiter, 2003. "Business Cycles, Unemployment Insurance, and the Calibration of Matching Models," CESifo Working Paper Series 1008, CESifo Group Munich.
  3. Fabio Canova & David López-Salido & Claudio Michelacci, 2007. "The labor market effects of technology shocks," Banco de España Working Papers 0719, Banco de España.
  4. Rubart, Jens, 2006. "Heterogeneous Labor, Labor Market Frictions and Employment Effects of Technological Change. Theory and Empirical Evidence for the U.S. and Europe," Darmstadt Discussion Papers in Economics 36783, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
  5. Jean-Baptiste Michau, . "Creative Destruction with On-the-Job Search," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  6. Fabio Canova & David Lopez-Salido & Claudio Michelacci, 2009. "The ins and outs of unemployment: An analysis conditional on technology shocks," Economics Working Papers 1213, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2012.
  7. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2007. "Technology—Policy Interaction in Frictional Labour-Markets," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1089-1124.

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