Technology-policy interaction in frictional labour-markets

Andreas Hornstein, Per Krusell, Giovanni L. Violante

    Research output: Contribution to journalArticle

    Abstract

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

    Original languageEnglish (US)
    Pages (from-to)1089-1124
    Number of pages36
    JournalReview of Economic Studies
    Volume74
    Issue number4
    DOIs
    StatePublished - Oct 2007

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    Interaction
    Labour market
    Technology policy
    Technological change
    Equilibrium unemployment
    Matching frictions
    Unemployment benefits
    Vintage capital
    Firm productivity
    Payroll tax
    Unemployment duration
    Labor share
    Labour demand
    Unemployment
    Firing costs
    Labor market regulation
    Labor market outcomes
    Irreversible investment
    Vacancy

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Technology-policy interaction in frictional labour-markets. / Hornstein, Andreas; Krusell, Per; Violante, Giovanni L.

    In: Review of Economic Studies, Vol. 74, No. 4, 10.2007, p. 1089-1124.

    Research output: Contribution to journalArticle

    Hornstein, Andreas ; Krusell, Per ; Violante, Giovanni L. / Technology-policy interaction in frictional labour-markets. In: Review of Economic Studies. 2007 ; Vol. 74, No. 4. pp. 1089-1124.
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