Technology–Policy Interaction in Frictional Labour-Markets |
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Authors: | ANDREAS HORNSTEIN PER KRUSELL GIOVANNI L VIOLANTE |
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Institution: | Federal Reserve Bank of Richmond; University of Rochester, Institute for International Economic Studies, Centre for Economic Policy Research (CEPR), Centro de Analisis y Estudios Rios Perez (CAERP) and National Bureau of Economic Research (NBER); New York University and CEPR |
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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. |
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