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Search in the Labour Market, Incomplete Contracts and Growth

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  • Acemoglu, Daron

Abstract

This paper shows that search in the labour market has important effects on accumulation decisions. In a labour market characterized by search, employment contracts are naturally incomplete and this creates a wedge between the rates of return and marginal products of both human and physical capital. As a result, when workers invest more in their human capital, they increase the rate of return on physical capital. Provided that these factors are complements in the production function, this will increase the desired level of investment for firms. Then, because physical capital is not being paid its marginal product, the rate of return on all human capital goes up. In this model, therefore, there are pecuniary increasing returns to scale in human capital accumulation in the sense that the more human capital there is, the more profitable it is to accumulate human capital. Applying this argument conversely, the presence of pecuniary increasing returns in physical capital accumulation also follows. These pecuniary increasing returns lead to amplified inefficiencies and to the possibility of multiple equilibria. They also imply that factor distribution of income has an important impact on growth. Finally, the paper derives new links between unemployment and human capital accumulation and shows that when technology choice is endogenized, search introduces a negative wage formation externality which may lead to excessively fast diffusion of new technologies.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1026.

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Date of creation: Sep 1994
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Handle: RePEc:cpr:ceprdp:1026

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Related research

Keywords: Growth; Human Capital; Incomplete Contracts; Search; Wage Determination;

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Cited by:
  1. Sergio Scicchitano, 2010. "Complementarity between heterogeneous human capital and R&D: can job-training avoid low development traps?," Empirica, Springer, vol. 37(4), pages 361-380, November.
  2. Fabio MARIANI, 2008. "Brain Drain, R&D-Cost Differentials and the Innovation Gap," Discussion Papers (REL - Recherches Economiques de Louvain) 2008031, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  3. Jean Gabszewicz & Alessandro Turrini, 1999. "Workers' Skills and Product Selection," Revue Économique, Programme National Persée, vol. 50(3), pages 383-391.
  4. Fabio Mariani, 2008. "Brain drain, R&D-cost differentials and the innovation gap," Post-Print halshs-00308746, HAL.
  5. Carillo Maria Rosaria, 2000. "The Effect of Professionalisation and the Demand for Social Status on the Adoption of New Technologies," Rivista italiana degli economisti, Società editrice il Mulino, issue 3, pages 473-502.
  6. Adriana Barone & Concetto Paolo Vinci, 2001. "The Working Environment And Social Increasing Returns," Working Papers 3_2001, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  7. Acemoglu, D, 1996. "Technology, Unemployment and Efficiency," Working papers 96-26, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Dessy, Sylvain E. & Pallage, Stephane, 2001. "Child labor and coordination failures," Journal of Development Economics, Elsevier, vol. 65(2), pages 469-476, August.
  9. Chander, Parkash & Thangavelu, Shandre M., 2004. "Technology adoption, education and immigration policy," Journal of Development Economics, Elsevier, vol. 75(1), pages 79-94, October.
  10. Sylvain Dessy & Stephane Pallage, 2002. "Fertility, Education, and Market Failures," Cahiers de recherche CREFE / CREFE Working Papers 148, CREFE, Université du Québec à Montréal.
  11. Stefania Zotteri, 2002. "Heterogeneity in Human Capital and Economic Growth," Temi di discussione (Economic working papers) 455, Bank of Italy, Economic Research and International Relations Area.

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