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Technology-policy interaction in frictional labor markets

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  • Andreas Hornstein
  • Per Krusell
  • Giovanni L. Violante

Abstract

Does capital-embodied technological change play an important role in shaping labor 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 labor demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labor market regulation—we analyze unemployment benefits, payroll and income taxes, and firing costs—exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labor market experience, relative to that of the United States: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labor share. A calibrated version of our model suggests that this technology-policy interaction could explain a sizeable fraction of the observed differences between the United States and Europe.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 06-10.

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Date of creation: 2006
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Handle: RePEc:fip:fedrwp:06-10

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Keywords: Technology;

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Cited by:
  1. Georg Duernecker, 2008. "Technology Adoption, Turbulence and the Dynamics of Unemployment," Economics Working Papers ECO2008/10, European University Institute.
  2. Langot, François & Moreno-Galbis, Eva, 2013. "Does the growth process discriminate against older workers?," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 286-306.
  3. Jean-Baptiste Michau, 2013. "Unemployment Insurance And Cultural Transmission: Theory And Application To European Unemployment," Journal of the European Economic Association, European Economic Association, vol. 11(6), pages 1320-1347, December.
  4. 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.
  5. Jean-Baptiste Michau, 2007. "Creative destruction with on-the-job search," LSE Research Online Documents on Economics 19658, London School of Economics and Political Science, LSE Library.
  6. 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).
  7. 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.
  8. 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.
  9. M. Magnani, 2009. "Labor share dynamics: a survey of the theory," Economics Department Working Papers 2009-EP07, Department of Economics, Parma University (Italy).
  10. Regis Barnichon & Andrew Figura, 2013. "Declining Labor Force Attachment and Downward Trends in Unemployment and Participation," Working Papers 728, Barcelona Graduate School of Economics.
  11. 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.).
  12. 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.
  13. 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.

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