Search, Technology Choice, and Unemployment

Technology variations among countries account for a significant part of their income differences. In this paper, a firm’s technology choice is embedded in a search theoretic framework for unemployment. A more advanced technology is assumed to have a higher set up cost, but it is more productive. The model is tractable and the following results are derived analytically. An increase in the unemployment benefit leads to an increase in the equilibrium wage rate, giving an incentive to firms to choose a more advanced technology. Thus, this result regarding unemployment insurance in models with wage posting carries through with Nash bargaining as well. As a consequence, the equilibrium unemployment rate increases. Furthermore, an increase in the bargaining power of workers increases the unemployment rate, but has an ambiguous impact on the equilibrium level of technology and the wage rate. Finally, an increase in the exogenous job separation rate or the interest rate increases the unemployment rate and decreases the wage rate but does not affect the equilibrium level of technology.