Contracting Productivity Growth

In this paper, we analyze the interactions between growth and the contracting environment in the production sector. Allowing incompleteness in contracting implies that viable production relationships for firms and workers, and therefore the profitability of industries, depend on the rates of innovation and growth. The speed at which new innovations arrive in turn depends on the profitability of production, for the usual reasons examined in the endogenous growth literature. We show that these interactions can have important implications which are consistent with observed phenomena in both the micro and macro environment. In particular, we demonstrate how this interaction can lead to a productivity slowdown and a shift in labour market contracts toward more short term arrangements. We show the consistency of an increase in the proportion of the labour force under short term employment, unchanged turnover, increased relative returns of workers in high productivity sectors, and increased income inequality, with a productivity slowdown of finite duration.