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Capital Accumulation and Employment Cycles in a Model of Creative Destruction

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  • Tapio Palokangas

Abstract

A Schumpeterian growth model is constructed for an economy with wage bargaining. It is shown that the economy is subject to cycles in which capital, output and employment vary in fixed proportion. These increase through saving and capital accumulation until a new technology is introduced, at which moment they fall sharply due to obsolescence of capital. When the labour market is deregulated to weaken workers’ position in bargaining, the labour-capital ratio increases but the average growth rate of the economy decreases. The growth cycle can be socially optimal. An elasticity rule is given for when the labour market should be regulated and when deregulated.

Suggested Citation

  • Tapio Palokangas, 2003. "Capital Accumulation and Employment Cycles in a Model of Creative Destruction," CESifo Working Paper Series 855, CESifo.
    • Handle: RePEc:ces:ceswps:_855
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    References listed on IDEAS

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    1. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 879-907.
    4. Palokangas,Tapio, 2010. "Labour Unions, Public Policy and Economic Growth," Cambridge Books, Cambridge University Press, number 9780521144056.
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    Keywords

    growth; cycles; labour unions; creative destruction;
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