Journal Article

Technology—Policy Interaction in Frictional Labour-Markets

Andreas Hornstein, Per Krusell and Giovanni L. Violante

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 4, pages 1089-1124
Published in print October 2007 | ISSN: 0034-6527
Published online October 2007 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00449.x
Technology—Policy Interaction in Frictional Labour-Markets

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  • Demand and Supply of Labour
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  • Corporate Governance

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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.

Keywords: D24; G31; J23; J64

Journal Article.  16575 words.  Illustrated.

Subjects: Demand and Supply of Labour ; Production and Organizations ; Mobility, Unemployment, and Vacancies ; Corporate Governance

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