This document summarizes an innovation-based endogenous growth model that incorporates equilibrium unemployment. The model examines how labor market reforms like improving job finding rates or increasing unemployment benefits impact long-run growth and unemployment. It finds that the relationship between growth and unemployment is always positive. However, the effects of labor market interventions depend on how impatient or patient consumers are in discounting future income. When consumers are impatient, reforms that improve job finding or increase benefits reduce both the long-run innovation rate and unemployment rate. But when consumers are patient, the effects are ambiguous and could increase both growth and unemployment.
One of the most pressing problems facing the Kenyan economy is the high rates of unemployment,
which has been erratic over the past few years. To examine the existing relationship between unemployment and
economic growth, this paper employed Johansen Cointegration, error correction mechanism (ECM),
American Journal of Multidisciplinary Research and Development is indexed, refereed and peer-reviewed journal, which is designed to publish research articles.
We examine the effects of establishment- and industry-level labor market turnover on employees’ well-being. The linked employer-employee panel data contain both survey information on employees’ subjective well-being and comprehensive register-based information on job and worker flows. Labor market turbulence decreases well-being as experienced job satisfaction and satisfaction with job security are negatively related to the previous year’s flows. We test for the existence of compensating wage differentials by explaining wages and job satisfaction with average uncertainties, measured by an indicator for a high moving average of past excessive turnover (churning) rate. The results are consistent with compensating wage differentials, since high uncertainty increases real wages, but has no effect on job satisfaction.
What Causes Economic Growth? A Breakdown of The Solow Growth ModelJaredBilberry1
The document summarizes an empirical study examining the Solow growth model and the augmented Solow model developed by Mankiw, Romer and Weil. The study uses data from 1960-1985 for non-oil producing countries to test the relationship between GDP per capita in 1985 and variables for investment, population growth, and secondary education. Descriptive statistics show average GDP increased from 1960 to 1985 while population and investment levels also rose. Correlation analysis found GDP correlated positively with investment and education, but negatively with population growth, supporting the models' predictions.
This paper explores how unemployment and self-employment impact the shadow economy during recessions and periods of economic growth using panel data from seven countries from 1999-2007. The paper finds that unemployment has a significant positive effect on the size of the shadow economy during recessions as unemployed individuals supplement their income through unreported work, but unemployment does not significantly impact the shadow economy during growth periods. Additionally, the paper finds that self-employment consistently has a statistically significant positive effect on the size of the shadow economy regardless of the economic cycle.
This paper studies wage adjustment during the recent crisis in regulated and unregulated labor markets in Italy. Using a unique dataset on immigrant workers, we show that before the crisis wages in the formal/regulated and informal/unregulated sectors moved in parallel (with a 15 percent premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32 percent. The dierence is especially salient for workers in "simple" occupations where there is high substitutability between immigrant and native workers. Our results are consistent with the view that labor market regulation prevents downward wage adjustment during recessions.
by Sergei Guriev, Biagio Speciale and Michele Tuccio. November 2015
Read more research analysis at https://www.hhs.se/site
The impact of unemployment rate on productivity growth in nigeria an error c...Alexander Decker
This document summarizes a journal article that examines the relationship between unemployment rate and productivity growth in Nigeria from 1986 to 2010. It uses cointegration and error correction modeling approaches. The results showed the variables were cointegrated but unemployment had an insignificant influence on productivity growth over the period. The document provides background on debates around the productivity-unemployment nexus. It reviews relevant literature and theories including search theory, real business cycles theory, and real wage rigidities. It describes the methodology and outlines sections on results, conclusions, and recommendations for government actions to address rising unemployment.
One of the most pressing problems facing the Kenyan economy is the high rates of unemployment,
which has been erratic over the past few years. To examine the existing relationship between unemployment and
economic growth, this paper employed Johansen Cointegration, error correction mechanism (ECM),
American Journal of Multidisciplinary Research and Development is indexed, refereed and peer-reviewed journal, which is designed to publish research articles.
We examine the effects of establishment- and industry-level labor market turnover on employees’ well-being. The linked employer-employee panel data contain both survey information on employees’ subjective well-being and comprehensive register-based information on job and worker flows. Labor market turbulence decreases well-being as experienced job satisfaction and satisfaction with job security are negatively related to the previous year’s flows. We test for the existence of compensating wage differentials by explaining wages and job satisfaction with average uncertainties, measured by an indicator for a high moving average of past excessive turnover (churning) rate. The results are consistent with compensating wage differentials, since high uncertainty increases real wages, but has no effect on job satisfaction.
What Causes Economic Growth? A Breakdown of The Solow Growth ModelJaredBilberry1
The document summarizes an empirical study examining the Solow growth model and the augmented Solow model developed by Mankiw, Romer and Weil. The study uses data from 1960-1985 for non-oil producing countries to test the relationship between GDP per capita in 1985 and variables for investment, population growth, and secondary education. Descriptive statistics show average GDP increased from 1960 to 1985 while population and investment levels also rose. Correlation analysis found GDP correlated positively with investment and education, but negatively with population growth, supporting the models' predictions.
This paper explores how unemployment and self-employment impact the shadow economy during recessions and periods of economic growth using panel data from seven countries from 1999-2007. The paper finds that unemployment has a significant positive effect on the size of the shadow economy during recessions as unemployed individuals supplement their income through unreported work, but unemployment does not significantly impact the shadow economy during growth periods. Additionally, the paper finds that self-employment consistently has a statistically significant positive effect on the size of the shadow economy regardless of the economic cycle.
This paper studies wage adjustment during the recent crisis in regulated and unregulated labor markets in Italy. Using a unique dataset on immigrant workers, we show that before the crisis wages in the formal/regulated and informal/unregulated sectors moved in parallel (with a 15 percent premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32 percent. The dierence is especially salient for workers in "simple" occupations where there is high substitutability between immigrant and native workers. Our results are consistent with the view that labor market regulation prevents downward wage adjustment during recessions.
by Sergei Guriev, Biagio Speciale and Michele Tuccio. November 2015
Read more research analysis at https://www.hhs.se/site
The impact of unemployment rate on productivity growth in nigeria an error c...Alexander Decker
This document summarizes a journal article that examines the relationship between unemployment rate and productivity growth in Nigeria from 1986 to 2010. It uses cointegration and error correction modeling approaches. The results showed the variables were cointegrated but unemployment had an insignificant influence on productivity growth over the period. The document provides background on debates around the productivity-unemployment nexus. It reviews relevant literature and theories including search theory, real business cycles theory, and real wage rigidities. It describes the methodology and outlines sections on results, conclusions, and recommendations for government actions to address rising unemployment.
The document provides a summary of global wage trends based on data from the United Nations and International Labour Organisation. Some key points include:
- Global wage growth decelerated in 2013 compared to 2012 and has yet to rebound to pre-crisis rates.
- Wage growth has been driven mostly by emerging and developing economies, with China alone accounting for almost half of global wage growth.
- Growth in wages in developed economies has remained flat.
- Between 1999-2013, labor productivity growth in developed economies outstripped real wage growth and labor's share of national income.
- Average wages in emerging economies are slowly converging towards those in developed economies.
Structural unemployment in Latvia risks becoming entrenched due to skills and geographical mismatches between labor supply and demand. This structural unemployment does not disappear on its own even during economic growth. Timely policy action is needed to minimize unemployment and its substantial costs, which include increased emigration and lower potential growth. Adequate policy measures could include active labor market policies to support labor demand through public employment services, training schemes, and employment subsidies in order to reduce both cyclical and structural unemployment.
The Causal Analysis of the Relationship between Inflation and Output Gap in T...inventionjournals
The purpose of the paper is to study dynamic relationships between the inflation and output gap by using Granger causality, Impulse response and variance decompositions analysis within VECM framework for the quarterly data over the first period of 2003 and second period of 2016. The results of the study indicate that the output gap Granger cause the inflation in Turkey both in short-and long-runs. Also, sign of the causality is negative and same causal relationships between two variables hold beyond the sample period. The results should be taken as an evidence of the conclusion that the output gap has important implications for the CBRT's monetary policy.
An empirical analysis of the incidence of corporate income taxAlexander Decker
This document summarizes a study on the incidence of corporate income tax in Ghana from 1997-2006. The study uses regression analysis of financial statement data from 10 manufacturing companies. The results showed:
1) A negative relationship between returns to shareholders and tax, indicating returns decrease as tax increases.
2) A negative relationship between labor costs and tax, indicating wages decrease as tax increases.
3) A positive relationship between gross profit percentage and tax, indicating consumer prices may increase as tax increases.
Progressive India in Output and Employmentectijjournal
Keeping in view, the limitations present in literature, we try to analyze for, the pattern of growth of output and employment and its determinants in Organised Manufacturing Sector in India. States which contribute to more than eighty percent of the total output and employment in India are considered. We use Gross Value Added and Total Output for the indicator measuring for Output. Total persons engaged and Labour Index are the indicators for Employment. This is one of our major contributions to literature. The research design of the study is based on secondary data. The findings reveal the impact of New Economic Policy across India as a whole and the impact of Global financial crisis across selected states. Liberalization has been able to make a significant positive impact while Global financial crisis had no effective impact. Employment growth has been positive after liberalization. This has also been observed through structural breaks. Over the period of Study, there has been increase in the number of states with a rising growth rate. Output Elasticity of employment has proved the job creating capability of each state as of India as a whole. In addition to these, we have observed the effect of determinants of output and employment growth across States. Thus, our work is a concise study on the two main parameters of the Indian economy which shall enrich the existing literature as well as policy makers for progressive development and a sustainable development of our nation.
This paper develops a forward-looking indicator for macroeconomic uncertainty that employers are confronted with when they take decisions about the size of their workforce. The model that provides the basis for this uncertainty indicator interprets hires and lay-offs of workers as an investment into projects with uncertain return. Employers decide when to undertake this investment. Uncertainty can then be derived as a function of a labour productivity threshold above which it is profitable for employers to hire workers. The measure that is first theoretically derived is then taken to the data. Economy-wide uncertainty for G7 economies and uncertainty by economic sector for the United States are calculated from data on hiring demand and unit labour costs. The resulting quarterly time series demonstrate that in most economies hiring uncertainty went up at the onset of the Great Recession and has remained at an elevated level since then. A panel VAR analysis reveals that hiring uncertainty excercises a significant, economically sizeable and persistent effect on both the output gap and unemployment.
1. The relationship between wages and productivity is complex, depending on factors like time horizon, market structure, and wage-setting mechanisms. In the short-run, standard theory suggests wages correspond to marginal productivity, but efficiency wage models reject this.
2. In the medium-run, bargained wages may differ from warranted wages due to changes in other factor prices, potentially leading to unemployment. Real and nominal wage rigidities also affect realignment of wages and productivity.
3. In the long-run, endogenous growth theory suggests moderate wage increases may not necessarily increase employment if technological change depends on capital investment influenced by wages.
Fiscal Policy And Trade Openness On Unemployment EssayRachel Phillips
Here are the key points about forecasting using vector autoregression (VAR) models:
- VAR models treat every variable in the system as endogenous and explain its behavior based on its own lags and lags of other variables. This allows all variables to influence each other.
- VAR models make forecasts by projecting the dynamics of all variables in the system based on estimated relationships between the variables and their lags.
- To generate forecasts, the VAR model is used to simulate future values of the variables by recursively using their estimated relationships. The forecasted values are produced by iterating the VAR model forward.
- Forecasts from VAR models can be evaluated using common metrics like mean squared forecast error to assess their accuracy relative to other
The nature of co-movement between total output and employment during the 1990s indicates that the relationship between employment growth and economic activity has been peculiar in Finland. This has been reflected, for example, in the developments of aggregate labour productivity. In particular, the years from 1992 to 1994 were exceptional. During that period productivity growth was very rapid, and, what is important, the trend of aggregate labour productivity shifted upwards. By only analysing the relationship between total output and employment it is impossible to say what happened during the period between 1992 and 1994. In this paper the relationship is analysed by utilizing industry-level data. The analysis shows that the rapid growth in aggregate productivity and the upward shift in the productivity trend mainly reflect similar developments in manufacturing, particularly in the metal industry. Even though the investigation is based on the use of industry-level data, it is still aggregative, which makes the interpretation of the results less clearcut. The existing studies which are based on the use of micro-level (e.g. plant-level) data support the interpretation which emphasizes the role of business restructuring and labour reallocation within manufacturing as the causes of rapid productivity growth and the upward shift in the trend productivity. The analysis is based on the estimation of simple structural VAR models.
“Can Firm-specific idiosyncratic financial data provide a solution to the mac...iosrjce
IOSR Journal of Economics and Finance (IOSR-JEF) discourages theoretical articles that are limited to axiomatics or that discuss minor variations of familiar models. Similarly, IOSR-JEF has little interest in empirical papers that do not explain the model's theoretical foundations or that exhausts themselves in applying a new or established technique (such as cointegration) to another data set without providing very good reasons why this research is important.
This document is a master's thesis that examines the impact of demographic, economic, and institutional factors on flexible employment patterns using international macroeconomic data. It aims to explore drivers of variation in temporary and self-employment across countries. The thesis finds that none of the selected determinants significantly explain differences in temporary employment, but globalization, age, and agricultural sector size are associated with differences in self-employment rates across countries.
unemployment in spain, causes and remedies .pptxMgirehBryan
Spain is faced with high unemployment rates since the 1980s. the country consistently ranks among the highest within the European Union with unemployment rate of 11.6% in the third quarter of 2023, which translates up to 2.77 million individuals , according to Statista. the uemployment rate average of the EU is 6.4%. The World bank indicates that the youth unemployment rate is at a concerning 27%. unemployment rates for individuals under 25 years old were above 50% in 2012, 2013, and 2014 but there has been significant decreases in this rates since 2017 where it was determined to be at around 35% (Verd et al., 2019). This prolonged period of elevated youth unemployment has had profound socio-economic repercussions, affecting not only the individuals directly impacted but also the broader economy and society as a whole.
socio-demographic characteristics and career trajectories contributes to this high unemployment rates in spain.
This document examines the impact of capital accumulation on labor productivity growth in Nigeria from 1970-2014. It finds that:
1) Education and health expenditures' impact on labor productivity growth depends on the time period, while health expenditures positively impact productivity and compensation to employees negatively impacts it.
2) Both physical and human capital accumulation in Nigeria have been volatile and generally low over the study period, constraining productivity and output growth.
3) The determinants of labor productivity growth examined include human capital accumulation, physical capital accumulation, real wages, and technology, based on endogenous growth and efficiency wage theories.
Using Granger Causality to Examine the Relationship Between Economic Growth a...inventionjournals
This study refers to Okun's Law on the economy in North Sumatera Province. Difference with previous studies, in this study the data used is not aggregate data but the data of each economic sector. In addition, the unemployment variable is proxy with the absorption of labor rate. The data analysis was tested by Granger Causality to determine the direction of the relationship between variables for growth of each economic sectors and absorption of labor. By using the Granger Causality Test analysis we concluded that the agricultural sector has a two-way direction relationship between economic growth and absorption of labor. Mining and Quarrying sector, construction sector, transport and communication sector and services sector only have one-way direction relationship from absorption of labor to economic growth. Electricity, gas and water supply have one-way direction relationship from economic growth to absorption of labor. Three other sectors are sectors manufacturing industry sector; trade, hotel and restaurant sector and finance, real estate and business service have no relationship at all between economic growth and absorption of labor.
This study investigates the role of adverse working conditions in the determination of individual wages and overall job satisfaction in the Finnish labour market. The potential influence of adverse working conditions on self-reported fairness of pay at the workplace is considered as an alternative, indirect measure of job satisfaction. The results show that working conditions have a very minor role in the determination of individual wages in the Finnish labour market. In contrast, adverse working conditions substantially increase the level of job dissatisfaction and the perception of unfairness of pay at the workplace
Economic consequences of changing fertility. Insights from an OLG modelGRAPE
We want to use macro models to evaluate effects of differenet demographic scenarios
Demographics drives majority of the macroeconomic changes in the foreseeable future
Fiscal effects will be large and unavoidable but larger TFR can mitigate them
Strong (political) discussions about ways to prevent demographic catastrophe...
...but what is the adequate cost of family policy - even if successful?
Figures we obtain go beyond the simple calculations in Excel (forward looking agents)
Unemployment has a statistically significant negative impact on Ethiopia's economic growth. The study used annual time series data from 1974-2014 and empirical analysis methods like Johansen cointegration and Vector Error Correction to examine the relationship. The results indicate that a 1% increase in unemployment leads to about a 0.82% decline in real GDP growth. To reduce this impact, the study recommends adopting more employment generation policies, improving labor productivity and agricultural productivity, and increasing linkages between sectors.
Unemployment is measured as the number of people willing and able to work but unable to find employment. There are different types of unemployment including cyclical, frictional, and structural. Theories of unemployment include the Keynesian and classical theories. Keynesian theory states that aggregate demand determines employment while classical theory says real wages impact employment. Unemployment has costs like reduced income and increased dependence. The NAIRU is the lowest unemployment rate that avoids inflation increases. Factors like productivity and benefits influence the NAIRU, which is important for policymakers to consider.
Informal Sector, Productivity and Tax CollectionDr Lendy Spires
The informal sector is a prominent characteristic of many developing countries. In recent years, there has been a large body of empirical work that tries to understand what determines the size of the informal.1Nonetheless, we are still far from understanding the relationship between the informal sector and the stage of economic development (La Porta and Shleifer (2008)). Is the informal sector good or bad for development? Some authors have argued that firms operating in the informal sector are less regulated and less taxed than firms in the formal sector, which allows them to operate more efficiently.
This, represents a positive force for development (see Schneider and Enste (2002)). In contrast, other authors have highlighted distortions that might arise in the presence of a large informal sector. For example, Lewis (2004) argues that informality distorts the “natural” competitive process as informal firms enjoy of an “unfair” cost advantage through tax avoidance; Farrell (2004) reports that some informal firms reduce their scale of operation in order to remain undetected by the government, which makes them less efficient; and Levy (2008) states that informality is a drag on the development process because it subsidizes employment in low-productive activities.
In this paper, I study the connection between the informal sector and economic development. I am interested in quantifying the effects on output and productivity of distortions associated with informality. To do this, I develop a general equilibrium model of occupational choice and capital accumulation that includes a tax collection policy with limited enforcement. Individuals have heterogeneous entrepreneurial abilities (as in Lucas (1978)) and each faces a discrete occupational choice: whether to be a formal entrepreneur, an informal entrepreneur or an employee. If formal, the entrepreneur pays taxes, if informal, the entrepreneur faces a probability of being caught that depends positively on the amount of capital hired.
The novelty in this paper is to connect informal sector data for a typical developing country to a general equilibrium model where the consequences of informality can be studied. I calibrate the model using data for Mexico, an economy where 31% of the employees work in informal establishments...
1999 Ap Us History Dbq Sample Essay. AP World History Sample DBQWendy Berg
The document discusses agricultural foreign investments abroad by Gulf Arab countries during the 1970s. Rising populations in Gulf countries led to food shortages and high cereal prices, triggering food price spikes and "Bread Revolutions." The article will focus on agricultural foreign investments made by Gulf nations abroad during this time period to address growing food gaps within their own countries.
Process Analysis Thesis Statement Examples. HowWendy Berg
The document discusses Abraham Lincoln's views and actions regarding slavery over the course of his life and political career. It describes how seeing slavery firsthand in New Orleans as a young man initially shaped his views, and how the Kansas-Nebraska Act later caused him to take an abolitionist stance. As a politician, Lincoln opposed the expansion of slavery and believed in white supremacy. He became a leading abolitionist and fought against the pro-slavery Democrat Stephen Douglas in the 1858 Senate race, further establishing himself as an opponent of slavery.
More Related Content
Similar to An Innovation-Based Endogenous Growth Model With Equilibrium Unemployment
The document provides a summary of global wage trends based on data from the United Nations and International Labour Organisation. Some key points include:
- Global wage growth decelerated in 2013 compared to 2012 and has yet to rebound to pre-crisis rates.
- Wage growth has been driven mostly by emerging and developing economies, with China alone accounting for almost half of global wage growth.
- Growth in wages in developed economies has remained flat.
- Between 1999-2013, labor productivity growth in developed economies outstripped real wage growth and labor's share of national income.
- Average wages in emerging economies are slowly converging towards those in developed economies.
Structural unemployment in Latvia risks becoming entrenched due to skills and geographical mismatches between labor supply and demand. This structural unemployment does not disappear on its own even during economic growth. Timely policy action is needed to minimize unemployment and its substantial costs, which include increased emigration and lower potential growth. Adequate policy measures could include active labor market policies to support labor demand through public employment services, training schemes, and employment subsidies in order to reduce both cyclical and structural unemployment.
The Causal Analysis of the Relationship between Inflation and Output Gap in T...inventionjournals
The purpose of the paper is to study dynamic relationships between the inflation and output gap by using Granger causality, Impulse response and variance decompositions analysis within VECM framework for the quarterly data over the first period of 2003 and second period of 2016. The results of the study indicate that the output gap Granger cause the inflation in Turkey both in short-and long-runs. Also, sign of the causality is negative and same causal relationships between two variables hold beyond the sample period. The results should be taken as an evidence of the conclusion that the output gap has important implications for the CBRT's monetary policy.
An empirical analysis of the incidence of corporate income taxAlexander Decker
This document summarizes a study on the incidence of corporate income tax in Ghana from 1997-2006. The study uses regression analysis of financial statement data from 10 manufacturing companies. The results showed:
1) A negative relationship between returns to shareholders and tax, indicating returns decrease as tax increases.
2) A negative relationship between labor costs and tax, indicating wages decrease as tax increases.
3) A positive relationship between gross profit percentage and tax, indicating consumer prices may increase as tax increases.
Progressive India in Output and Employmentectijjournal
Keeping in view, the limitations present in literature, we try to analyze for, the pattern of growth of output and employment and its determinants in Organised Manufacturing Sector in India. States which contribute to more than eighty percent of the total output and employment in India are considered. We use Gross Value Added and Total Output for the indicator measuring for Output. Total persons engaged and Labour Index are the indicators for Employment. This is one of our major contributions to literature. The research design of the study is based on secondary data. The findings reveal the impact of New Economic Policy across India as a whole and the impact of Global financial crisis across selected states. Liberalization has been able to make a significant positive impact while Global financial crisis had no effective impact. Employment growth has been positive after liberalization. This has also been observed through structural breaks. Over the period of Study, there has been increase in the number of states with a rising growth rate. Output Elasticity of employment has proved the job creating capability of each state as of India as a whole. In addition to these, we have observed the effect of determinants of output and employment growth across States. Thus, our work is a concise study on the two main parameters of the Indian economy which shall enrich the existing literature as well as policy makers for progressive development and a sustainable development of our nation.
This paper develops a forward-looking indicator for macroeconomic uncertainty that employers are confronted with when they take decisions about the size of their workforce. The model that provides the basis for this uncertainty indicator interprets hires and lay-offs of workers as an investment into projects with uncertain return. Employers decide when to undertake this investment. Uncertainty can then be derived as a function of a labour productivity threshold above which it is profitable for employers to hire workers. The measure that is first theoretically derived is then taken to the data. Economy-wide uncertainty for G7 economies and uncertainty by economic sector for the United States are calculated from data on hiring demand and unit labour costs. The resulting quarterly time series demonstrate that in most economies hiring uncertainty went up at the onset of the Great Recession and has remained at an elevated level since then. A panel VAR analysis reveals that hiring uncertainty excercises a significant, economically sizeable and persistent effect on both the output gap and unemployment.
1. The relationship between wages and productivity is complex, depending on factors like time horizon, market structure, and wage-setting mechanisms. In the short-run, standard theory suggests wages correspond to marginal productivity, but efficiency wage models reject this.
2. In the medium-run, bargained wages may differ from warranted wages due to changes in other factor prices, potentially leading to unemployment. Real and nominal wage rigidities also affect realignment of wages and productivity.
3. In the long-run, endogenous growth theory suggests moderate wage increases may not necessarily increase employment if technological change depends on capital investment influenced by wages.
Fiscal Policy And Trade Openness On Unemployment EssayRachel Phillips
Here are the key points about forecasting using vector autoregression (VAR) models:
- VAR models treat every variable in the system as endogenous and explain its behavior based on its own lags and lags of other variables. This allows all variables to influence each other.
- VAR models make forecasts by projecting the dynamics of all variables in the system based on estimated relationships between the variables and their lags.
- To generate forecasts, the VAR model is used to simulate future values of the variables by recursively using their estimated relationships. The forecasted values are produced by iterating the VAR model forward.
- Forecasts from VAR models can be evaluated using common metrics like mean squared forecast error to assess their accuracy relative to other
The nature of co-movement between total output and employment during the 1990s indicates that the relationship between employment growth and economic activity has been peculiar in Finland. This has been reflected, for example, in the developments of aggregate labour productivity. In particular, the years from 1992 to 1994 were exceptional. During that period productivity growth was very rapid, and, what is important, the trend of aggregate labour productivity shifted upwards. By only analysing the relationship between total output and employment it is impossible to say what happened during the period between 1992 and 1994. In this paper the relationship is analysed by utilizing industry-level data. The analysis shows that the rapid growth in aggregate productivity and the upward shift in the productivity trend mainly reflect similar developments in manufacturing, particularly in the metal industry. Even though the investigation is based on the use of industry-level data, it is still aggregative, which makes the interpretation of the results less clearcut. The existing studies which are based on the use of micro-level (e.g. plant-level) data support the interpretation which emphasizes the role of business restructuring and labour reallocation within manufacturing as the causes of rapid productivity growth and the upward shift in the trend productivity. The analysis is based on the estimation of simple structural VAR models.
“Can Firm-specific idiosyncratic financial data provide a solution to the mac...iosrjce
IOSR Journal of Economics and Finance (IOSR-JEF) discourages theoretical articles that are limited to axiomatics or that discuss minor variations of familiar models. Similarly, IOSR-JEF has little interest in empirical papers that do not explain the model's theoretical foundations or that exhausts themselves in applying a new or established technique (such as cointegration) to another data set without providing very good reasons why this research is important.
This document is a master's thesis that examines the impact of demographic, economic, and institutional factors on flexible employment patterns using international macroeconomic data. It aims to explore drivers of variation in temporary and self-employment across countries. The thesis finds that none of the selected determinants significantly explain differences in temporary employment, but globalization, age, and agricultural sector size are associated with differences in self-employment rates across countries.
unemployment in spain, causes and remedies .pptxMgirehBryan
Spain is faced with high unemployment rates since the 1980s. the country consistently ranks among the highest within the European Union with unemployment rate of 11.6% in the third quarter of 2023, which translates up to 2.77 million individuals , according to Statista. the uemployment rate average of the EU is 6.4%. The World bank indicates that the youth unemployment rate is at a concerning 27%. unemployment rates for individuals under 25 years old were above 50% in 2012, 2013, and 2014 but there has been significant decreases in this rates since 2017 where it was determined to be at around 35% (Verd et al., 2019). This prolonged period of elevated youth unemployment has had profound socio-economic repercussions, affecting not only the individuals directly impacted but also the broader economy and society as a whole.
socio-demographic characteristics and career trajectories contributes to this high unemployment rates in spain.
This document examines the impact of capital accumulation on labor productivity growth in Nigeria from 1970-2014. It finds that:
1) Education and health expenditures' impact on labor productivity growth depends on the time period, while health expenditures positively impact productivity and compensation to employees negatively impacts it.
2) Both physical and human capital accumulation in Nigeria have been volatile and generally low over the study period, constraining productivity and output growth.
3) The determinants of labor productivity growth examined include human capital accumulation, physical capital accumulation, real wages, and technology, based on endogenous growth and efficiency wage theories.
Using Granger Causality to Examine the Relationship Between Economic Growth a...inventionjournals
This study refers to Okun's Law on the economy in North Sumatera Province. Difference with previous studies, in this study the data used is not aggregate data but the data of each economic sector. In addition, the unemployment variable is proxy with the absorption of labor rate. The data analysis was tested by Granger Causality to determine the direction of the relationship between variables for growth of each economic sectors and absorption of labor. By using the Granger Causality Test analysis we concluded that the agricultural sector has a two-way direction relationship between economic growth and absorption of labor. Mining and Quarrying sector, construction sector, transport and communication sector and services sector only have one-way direction relationship from absorption of labor to economic growth. Electricity, gas and water supply have one-way direction relationship from economic growth to absorption of labor. Three other sectors are sectors manufacturing industry sector; trade, hotel and restaurant sector and finance, real estate and business service have no relationship at all between economic growth and absorption of labor.
This study investigates the role of adverse working conditions in the determination of individual wages and overall job satisfaction in the Finnish labour market. The potential influence of adverse working conditions on self-reported fairness of pay at the workplace is considered as an alternative, indirect measure of job satisfaction. The results show that working conditions have a very minor role in the determination of individual wages in the Finnish labour market. In contrast, adverse working conditions substantially increase the level of job dissatisfaction and the perception of unfairness of pay at the workplace
Economic consequences of changing fertility. Insights from an OLG modelGRAPE
We want to use macro models to evaluate effects of differenet demographic scenarios
Demographics drives majority of the macroeconomic changes in the foreseeable future
Fiscal effects will be large and unavoidable but larger TFR can mitigate them
Strong (political) discussions about ways to prevent demographic catastrophe...
...but what is the adequate cost of family policy - even if successful?
Figures we obtain go beyond the simple calculations in Excel (forward looking agents)
Unemployment has a statistically significant negative impact on Ethiopia's economic growth. The study used annual time series data from 1974-2014 and empirical analysis methods like Johansen cointegration and Vector Error Correction to examine the relationship. The results indicate that a 1% increase in unemployment leads to about a 0.82% decline in real GDP growth. To reduce this impact, the study recommends adopting more employment generation policies, improving labor productivity and agricultural productivity, and increasing linkages between sectors.
Unemployment is measured as the number of people willing and able to work but unable to find employment. There are different types of unemployment including cyclical, frictional, and structural. Theories of unemployment include the Keynesian and classical theories. Keynesian theory states that aggregate demand determines employment while classical theory says real wages impact employment. Unemployment has costs like reduced income and increased dependence. The NAIRU is the lowest unemployment rate that avoids inflation increases. Factors like productivity and benefits influence the NAIRU, which is important for policymakers to consider.
Informal Sector, Productivity and Tax CollectionDr Lendy Spires
The informal sector is a prominent characteristic of many developing countries. In recent years, there has been a large body of empirical work that tries to understand what determines the size of the informal.1Nonetheless, we are still far from understanding the relationship between the informal sector and the stage of economic development (La Porta and Shleifer (2008)). Is the informal sector good or bad for development? Some authors have argued that firms operating in the informal sector are less regulated and less taxed than firms in the formal sector, which allows them to operate more efficiently.
This, represents a positive force for development (see Schneider and Enste (2002)). In contrast, other authors have highlighted distortions that might arise in the presence of a large informal sector. For example, Lewis (2004) argues that informality distorts the “natural” competitive process as informal firms enjoy of an “unfair” cost advantage through tax avoidance; Farrell (2004) reports that some informal firms reduce their scale of operation in order to remain undetected by the government, which makes them less efficient; and Levy (2008) states that informality is a drag on the development process because it subsidizes employment in low-productive activities.
In this paper, I study the connection between the informal sector and economic development. I am interested in quantifying the effects on output and productivity of distortions associated with informality. To do this, I develop a general equilibrium model of occupational choice and capital accumulation that includes a tax collection policy with limited enforcement. Individuals have heterogeneous entrepreneurial abilities (as in Lucas (1978)) and each faces a discrete occupational choice: whether to be a formal entrepreneur, an informal entrepreneur or an employee. If formal, the entrepreneur pays taxes, if informal, the entrepreneur faces a probability of being caught that depends positively on the amount of capital hired.
The novelty in this paper is to connect informal sector data for a typical developing country to a general equilibrium model where the consequences of informality can be studied. I calibrate the model using data for Mexico, an economy where 31% of the employees work in informal establishments...
Similar to An Innovation-Based Endogenous Growth Model With Equilibrium Unemployment (20)
1999 Ap Us History Dbq Sample Essay. AP World History Sample DBQWendy Berg
The document discusses agricultural foreign investments abroad by Gulf Arab countries during the 1970s. Rising populations in Gulf countries led to food shortages and high cereal prices, triggering food price spikes and "Bread Revolutions." The article will focus on agricultural foreign investments made by Gulf nations abroad during this time period to address growing food gaps within their own countries.
Process Analysis Thesis Statement Examples. HowWendy Berg
The document discusses Abraham Lincoln's views and actions regarding slavery over the course of his life and political career. It describes how seeing slavery firsthand in New Orleans as a young man initially shaped his views, and how the Kansas-Nebraska Act later caused him to take an abolitionist stance. As a politician, Lincoln opposed the expansion of slavery and believed in white supremacy. He became a leading abolitionist and fought against the pro-slavery Democrat Stephen Douglas in the 1858 Senate race, further establishing himself as an opponent of slavery.
College Apa Format College Research Paper Outline TWendy Berg
Starbucks started as a small coffee shop in Seattle over 40 years ago and has since expanded to become a global leader in the coffee house industry with thousands of stores worldwide. As the largest coffeehouse company in the world, Starbucks has established itself as a dominant brand by offering high quality coffee and a consistent customer experience across its extensive international footprint. The company's success demonstrates humans' strong affinity for coffee and Starbucks' ability to capitalize on growing worldwide demand through strategic expansion and establishment of its well-known brand.
Exactely How Much Is Often A 2 Web Site EsWendy Berg
The document discusses migration patterns in North Africa and the Eastern Mediterranean region during the 19th century. It outlines how countries like Algeria, Tunisia, Egypt, and what is now Libya experienced significant European immigration and colonial influence during this time period. Broader migration trends across other areas are also touched upon at a high level.
The article discusses Kurt Lewin's model of change which involves three stages: unfreezing, moving to a
new state, and refreezing in the new state. This model is still relevant for understanding organizational
change today. For workplace education programs to be effective in creating behavioral change, they need
to recognize that change is a process, not an event, and address attitudes, skills and situations
simultaneously. Programs also need strategies to "unfreeze" current behaviors and habits in order to prepare
employees for change. Finally, for changes to stick, programs must provide support structures and incentives
to
Writing Music - Stock Photos Motion ArrayWendy Berg
The document provides instructions for requesting writing assistance from the HelpWriting.net website. It outlines a 5 step process: 1) Create an account with a password and email, 2) Complete a form with assignment details and deadline, 3) Review bids from writers and select one, 4) Receive the completed paper, and 5) Request revisions if needed. The website promises original, high-quality content and refunds for plagiarized work.
Writing Legal Essays - Law Research Writing Skills -Wendy Berg
1. The document provides instructions for using the writing assistance service HelpWriting.net. It outlines a 5-step process: register for an account, submit a request form with instructions and deadline, review writer bids and select one, authorize payment after receiving satisfactory work, and request revisions if needed.
2. The service offers original, plagiarism-free assignments and allows multiple revisions to ensure customer satisfaction. Writers are selected through a bidding system based on qualifications.
Writing Paper Clipart Writing Paper Png VectorWendy Berg
Dell is a leading technology company that offers a wide range of products and services including desktop computers, servers, networking equipment, storage, software and IT services. The company mainly operates in the consumer and commercial markets selling directly to customers and through retailers. Dell was founded in 1984 by Michael Dell and has grown to become one of the largest technology companies in the world with a focus on innovation, customer service and delivering the latest technology.
This document discusses how cancer affected one person's family. It describes how the author's mother was diagnosed with stage four cancer that had spread to her bladder, giving her less than 90 days to live. The family decided not to tell the mother about the terminal diagnosis. The author took a month off work to spend time with their mother during her final days. Eventually the mother passed away peacefully surrounded by family remembering past holidays together.
The document outlines Uyen's philosophy on partnerships with children and families in early childhood education. It emphasizes building safe, respectful relationships through listening to children and families, supporting their interests and needs, and involving families in decision making. Partnerships are important for children's learning and sense of identity. The philosophy is focused on respecting children and families' cultures, languages, and ways of developing skills.
Pros:
- Small town feel with a population of just over 12,000 provides a more relaxed environment than nearby Denver.
- Close proximity to Denver (only 7 miles away) allows easy access to the city's amenities and activities.
- Historically served as a railroad town in the late 1920s, giving it industrial roots.
Cons:
- As a suburb of Denver, it has less employment opportunities than the larger city.
- Small population means fewer cultural activities and dining/entertainment options compared to Denver.
- Development did not really take off until 1940, so it lacks the long-established infrastructure
How To Write A Policy Paper For A Nurse -. Online assignment writing service.Wendy Berg
The document discusses rush week activities for a fraternity, noting that the author spoke to potential new members as part of rush week. One conversation was with a friend who was going through rush. A variety of topics were discussed with the group of freshmen and sophomores during rush week conversations.
The document discusses the process of ordering essay writing help from the website HelpWriting.net, including creating an account, submitting a request with instructions and sources, reviewing bids from writers and choosing one, making a deposit, reviewing and authorizing payment for the completed work, and having the option to request revisions. The website promises original, high-quality content and a refund if work is plagiarized, aiming to fully meet customer needs.
The document provides instructions for creating an account and submitting assignment requests on the HelpWriting.net website. It outlines a 5-step process: 1) Create an account with an email and password. 2) Complete a form with assignment details, sources, and deadline. 3) Review bids from writers and choose one. 4) Review the completed paper and authorize payment. 5) Request revisions until satisfied, with a refund option for plagiarism. The purpose is to outline the process for students to receive writing help and ensure satisfaction.
D.J. and I share some key similarities as we are both kind and caring individuals. However, we also have our differences as D.J. is a fictional character from a TV show while I am a real person. Overall, while we share positive traits, D.J. and I ultimately lead very different lives.
4 Best Printable Christmas Borders - Printablee.ComWendy Berg
This document provides instructions for requesting writing assistance from HelpWriting.net. It outlines a 5-step process: 1) Create an account, 2) Complete an order form providing instructions, sources, and deadline, 3) Review bids from writers and select one, 4) Receive the paper and authorize payment if satisfied, 5) Request revisions until satisfied. It emphasizes original, high-quality content and refunds for plagiarized work.
How To Write An Analytical Essay On A Short Story - HoWendy Berg
The document provides instructions on how to request an analytical essay be written through the HelpWriting.net website. It outlines a 5-step process: 1) Create an account with a password and email; 2) Complete a 10-minute order form with instructions, sources, and deadline; 3) Review bids from writers and choose one; 4) Review the completed paper and authorize payment; 5) Request revisions until satisfied. It emphasizes original, high-quality work and refunds for plagiarism.
008 Essay Example Life Changing Experience PsycWendy Berg
Here are the key aspects I would focus on in order to persuade a foreign company to invest in India:
1. Market potential and size. India has a population of over 1.3 billion people, giving foreign companies access to a huge domestic market. With rising incomes and consumer spending, India offers great potential for market expansion.
2. Low costs. Labor costs in India are significantly lower than developed markets. This allows companies to produce goods and deliver services at highly competitive prices. Combined with the large market size, low costs allow good prospects for profits.
3. Skilled workforce. India has a large, English-speaking population that provides a skilled workforce in areas like engineering, IT, finance etc. The workforce is adapted
The document provides information about poverty in the Czech Republic compared to global poverty rates and other European countries. It shows that from 2006 to 2012, less than 0% of the Czech population lived on less than $1.90 per day, compared to around 15% of the world population. Additionally, the percentage of the Czech population living under the at-risk poverty threshold (set at 60% of the national median income) fluctuated between 8-10% from 2005 to 2014, which is lower than the average of 27 European countries. The document also notes that Czech Republic has a lower inequality of income distribution compared to other European nations.
10 Easy Steps How To Write A Thesis For An Essay In 2024Wendy Berg
This document provides a 10 step process for writing a thesis for an essay in 2024. It instructs the reader to create an account on HelpWriting.net to request paper writing assistance. The reader is then told to complete an order form with their instructions and attach any sample work. Writers will bid on the request and the reader can choose a writer based on qualifications. The writer will complete the paper and the reader can request revisions until satisfied.
How Barcodes Can Be Leveraged Within Odoo 17Celine George
In this presentation, we will explore how barcodes can be leveraged within Odoo 17 to streamline our manufacturing processes. We will cover the configuration steps, how to utilize barcodes in different manufacturing scenarios, and the overall benefits of implementing this technology.
How to Download & Install Module From the Odoo App Store in Odoo 17Celine George
Custom modules offer the flexibility to extend Odoo's capabilities, address unique requirements, and optimize workflows to align seamlessly with your organization's processes. By leveraging custom modules, businesses can unlock greater efficiency, productivity, and innovation, empowering them to stay competitive in today's dynamic market landscape. In this tutorial, we'll guide you step by step on how to easily download and install modules from the Odoo App Store.
Temple of Asclepius in Thrace. Excavation resultsKrassimira Luka
The temple and the sanctuary around were dedicated to Asklepios Zmidrenus. This name has been known since 1875 when an inscription dedicated to him was discovered in Rome. The inscription is dated in 227 AD and was left by soldiers originating from the city of Philippopolis (modern Plovdiv).
This presentation was provided by Racquel Jemison, Ph.D., Christina MacLaughlin, Ph.D., and Paulomi Majumder. Ph.D., all of the American Chemical Society, for the second session of NISO's 2024 Training Series "DEIA in the Scholarly Landscape." Session Two: 'Expanding Pathways to Publishing Careers,' was held June 13, 2024.
This presentation was provided by Rebecca Benner, Ph.D., of the American Society of Anesthesiologists, for the second session of NISO's 2024 Training Series "DEIA in the Scholarly Landscape." Session Two: 'Expanding Pathways to Publishing Careers,' was held June 13, 2024.
CapTechTalks Webinar Slides June 2024 Donovan Wright.pptxCapitolTechU
Slides from a Capitol Technology University webinar held June 20, 2024. The webinar featured Dr. Donovan Wright, presenting on the Department of Defense Digital Transformation.
CapTechTalks Webinar Slides June 2024 Donovan Wright.pptx
An Innovation-Based Endogenous Growth Model With Equilibrium Unemployment
1. An Innovation-Based Endogenous Growth Model
with Equilibrium Unemployment
Carmelo Pierpaolo Parelloy
This Draft: October 10, 2007
Abstract
This paper studies the impact of labor market reforms on growth and
unemployment. To do this, a no-shirking model of innovation-based growth
is constructed, where labor market reforms are mainly aimed at improv-
ing job …nding rate and increasing unemployment bene…t. On a positive
standpoint, we …nd that there always exists a positive relationship between
growth and unemployment. Instead, from a normative standpoint, we …nd
that the e¤ectiveness of all labor market interventions crucially depend on
how individuals discount future income. When consumers are impatient,
we …nd that improving either labor market performance or unemployment
bene…t turns out to induce a permanent fall in both the BGP innovation
rate and the equilibrium unemployment rate. When consumers are patient,
results turn ambiguous with cases in which both growth and unemployment
rates might increase.
Jel classi…cation: O33, O34, J6
Keywords: R&D-based growth, wage rigidities, unemployment.
Department of Public Economy - University of Rome ”La Sapienza” and Department of Eco-
nomics - IRES, Catholic University of Louvain. Contact address: Via del Castro Laurenziano,
9 - Room 621. 00161 - Rome. Email: carmelo.parello@uniroma1.it; Phone: +39-06-49766987.
y
I am particularly grateful to Klaus Walde and Paul Segerstrom for fruitful comments and
suggestions. I also thank Raouf Boucekkine, David De-la-Croix and Frederick Doquier for
comments on a …rst version of the paper. The remaining errors are mine.
1
2. 1 Introduction
The question of whether growth can destroy employment has been widely debated
in economics. According to Aricò (2003), it is possible to gather the existing
theoretical studies on growth and unemployment along two distinct research lines.
The …rst line focuses on institutional issues and leads to policy-oriented models
(Gordon, 1995; Cahuc and Michel, 1996; Van Schaick and De Groot 1998; Daveri
and Tabellini, 2000; and Peretto 2000 among others). The second line focuses on
technical change and addresses the issue of growth and unemployment at either
micro or macro level ( Aghion and Howitt 1994; Acemoglu, 1997; Postel-Vinay,
1998; Cerisier and Postel-Vinay 1998; and Mortensen, 2003). In both cases
though, no clear prediction about how growth a¤ects unemployment is gained.
On the empirical side, results are far from being clear and confusion still
persists over this issue. Muscatelli and Tirelli (2001), for instance, …nd negat-
ive correlation between growth and unemployment, while Caballero (1993) and
Hoon and Phelps (1997) …nd a positive relationship between changes in unem-
ployment and several measures of productivity growth. In contrast, Bean and
Pissarides (1993) …nd no clear-cut correlation between productivity growth and
unemployment whereas Aghion and Howitt (1992) point out that both high and
low growth countries experience lower unemployment rate compared with those
with intermediate growth experiences.
Thus far, the most fundamental papers have mainly based on the Pissarides’
(1990) standard search model. This paper tries to investigate the existence of
a possible linkage between growth and unemployment through a dynamic no-
shirking model with creative destruction. Although criticized, e¢ciency-wages
models are still considered a good tool to explain altogether real wages rigidity
and unemployment.1 In terms of a growth model though, a characteristic of the
original Shapiro and Stiglitz (1984) model is its unrealistic prediction of a fall
in the equilibrium unemployment rate in presence of productivity improvements
owed to the fact that the no-shirking condition is independent on productivity
improvement. One contribution of this paper is to link the no-shirking condition
with an endogenous variable measuring the speed of productivity growth.2 As the
creation of more productive production processes pushes long-run growth, innov-
1
For empirical evaluations of the e¢ciency-wages models see Danthine and Donaldson (1995)
and Gomme (1999).
2
Phelps (1994) pursue the same objective by introducing optimal saving and a nonlinear util-
ity function into the standard Shapiro and stiglitz’s framework. He …nds that the accumulation
of wealth increases the wage needed for maintaining the equilibrium level of e¤ort unchanged.
2
3. ation generates obsolescence of some production units (creative destruction) and
forces …rms to release workers. The presence of labor market rigidity, modelled
through the adoption of a positive (not in…nite) rate of job …nding, makes in-
novation to induce unemployment. As in the original Shapiro and Stiglitz (1984)
model, we assume that the rate of job …nding is exogenously given by institu-
tional factors such as, for instance, labor/product market regulations or local
rigidities.
The …rst contribution combining creative destruction and unemployment is
that of Aghion and Howitt (1994). Technically speaking, their study can be split
in two parts. The …rst part addresses the issue of growth and unemployment in a
standard search model à la Pissarides (1990) with exogenous aggregate growth.
They …nd that the relationship between growth and unemployment can be either
positive or negative depending on the relative strength of two competing e¤ect
(namely, capitalization and creative destruction). In the second part they allow
for a fully endogenous growth model by integrating their notorious version of
vertical innovation process into the basic model. They …nd that the equilibrium
unemployment rate is totally independent on the steady-state rate of growth, in
the sense that any change in the frequencies of innovation generates no e¤ect
on employment. In contrast to Aghion and Howitt (1994), our model di¤er
in that of predicting a positive relation between growth and unemployment. A
permanent increase in the BGP rate of innovation generates a permanent increase
in the equilibrium unemployment rate and vice versa. As a result, the positive
result of the model is the absence of any possible trade-o¤ between growth and
unemployment in the long-run.
The model is solved for the balanced-growth path (BGP) and exploited to
study the e¤ect of some unemployment policy on growth and unemployment.
Firstly, the paper focuses on the BGP e¤ects of improving labor market perform-
ance by mean of an exogenous increase in the rate of job …nding. We …nd that
increased job …nding rate increases the BGP per capita GDP while has mixed
e¤ects on long-run growth. We show that the e¤ectiveness of such a policy on
growth crucially depends on the rate at which individuals discount future pro…ts.
More speci…cally, in the presence of low subjective discount rate, improving labor
market performance enhances long-run growth via a permanent increase in the
BGP innovation rate, and vice versa. In terms of unemployment, results are as
well driven by those on innovation and turn out to depends on the size of the
subjective discount rate. When the subjective discount rate is relatively high,
an increase in the rate of job …nding generates a reduction in the BGP rate of
3
4. unemployment. Unlike, when the subjective discount rate is relatively low, an
increase in the rate of job …nding has mixed e¤ect on the BGP unemployment
rate and a trade-o¤ between growth and unemployment is likely to emerge in
the long-run. Secondly, the paper studies what is the impact of an increase of
the unemployment bene…t. In terms of the growth performance, we …nd that the
comparative statics analysis results are very similar to those of an increase in the
exogenous job …nding rate. Instead, in terms of unemployment, results are more
clear-cut and rule out the existence of a possible trade-o¤ between growth and
unemployment.
The paper is organized as follow. Section 2.2 reviews the most important con-
tributions of e¢ciency-wages unemployment and growth. Section 2.3 setups the
model. Section 2.4 displays the main properties of the BGP equilibrium. Section
2.5 presents the comparative statics analysis and provides some possible economic
interpretation of the most important results. Finally, Section 2.6 concludes.
2 E¢ciency wages in a growing economy
Up to now, only few papers have used e¢ciency-wages scheme for growth studies.
The …rst approach to growth with e¢ciency-wages is the paper by Van Schaik
and De Groot (1998). In this contribution, the Authors build on the R&D-based
growth model of Smulders and Van der Klundert (1995) where e¢ciency-wage
unemployment occurs because e¤ort in one sector of the economy (in the sector
producing intermediate goods) is positively related to the relative wage paid in
the rest of the economy. In their paper a dual labor market based à la Katz
and Summers (1989) is combined with a process of in-house R&D using only
high-wage workers. They …nd that an increase in the elasticity of substitution
between product varieties reduces market power, increases long-run growth but
reduces labor employment. Moreover, in presence of barriers to entry, they …nd
that removing entry impediments lowers growth and induces mixed e¤ects on
equilibrium unemployment.
Meckl (2001) examines the long-run implications of e¢ciency-wages induced
unemployment within a general-equilibrium model of endogenous growth with
creative destruction. In his framework, e¢ciency-wages unemployment occurs
because e¤ort in one sector of the economy is positively related to the relative
wage paid by that sector in the way proposed by Katz and Summers (1989).
The starting point of this study is the oddly prediction of the Van Schaik and De
Groot’s (1998) model that wage di¤erentials have no e¤ect on labor productivity,
4
5. which makes the wage structure of the economy in the presence of a homogen-
eous workforce unexplained by the model. To skip the hurdle, Meckl adopt the
Arkelof’s (Arkelof (1982) and Arkelof and Yellen (1990)) idea of fairness norm
and builds an R&D based-endogenous growth model in the spirit of Aghion and
Howitt (1992, 1998). The agent’s decision whether to exert or not exert e¤ort is
driven by the distance separating the wage rate o¤ered by the …rm and a refer-
ence wage given by the average wage of the economy. In the long-run, the Author
…nds that the sign of the correlation between the rate of growth and the rate of
unemployment is ambiguous in general, but always strictly related to the sign
of the intersectoral wage di¤erentials. More Speci…cally, the model predicts a
positive relationship between growth and unemployment if the research sector is
the high wage sector of the economy, while a negative relationship if the research
sector is the low wage sector.
Meckl (2002) analyzes the relation between long-run growth and unemploy-
ment induced by e¢ciency wages and how the emergence of a growth–unemployment
trade-o¤ is linked to intersectoral wage di¤erentials. He …nds that both growth
and unemployment depends on the intersectoral allocation of labor that the rela-
tion between the growth and equilibrium unemployment is ambiguous in gen-
eral. He also …nd that the importance of wage di¤erentials for the growth-
unemployment trade-o¤ is preserved when di¤erentiating between skilled and
unskilled labor and that higher minimum wages for unskilled labor raise growth
and unskilled unemployment, while possibly reducing unemployment of skilled
labor.
Mendez (2002) uses an e¢ciency-wages mechanism to explain several eco-
nomic issues related to growth and wage inequality. In particular, the paper
tries to provide a theoretical explanation to both the rising within-group wage
inequality and the volatility of earnings. The model used is based on a dual
labor market, that di¤ers from the aforementioned papers owed to the presence
of a non-homogeneous workforce. The paper demonstrates that unbiased innov-
ation can contribute to explain within group wage inequality but says nothing
on equilibrium unemployment.
Brecher et al. (2002) studies the long-run relationship between unemployment
and growth through an dynamical e¢ciency-wage model with labor-augmenting
technical progress. In order to keep the analysis as general as possible, the
Authors assume that the rate of productivity growth is either exogenous or en-
dogenous, and …nd that in both cases the key results of the Shapiro and Stiglitz
(1983) analysis without growth are preserved. They …nd that an exogenous in-
5
6. crease in the growth rate may raise the rate of e¢ciency-wage unemployment,
while a permanent raise in the labor force may reduce the unemployment rate
in the endogenous-growth case. In presence of endogenous growth, the paper
shows that an increase in unemployment bene…ts raises the unemployment rate
and lowers the rate of growth.
Palokangas (2003) studies the impact of improving labor market competition
on economic growth and unemployment. In doing so, he presents an R&D-based
endogenous growth model in which unemployment is caused by e¢ciency wages
and union-…rm bargaining. He shows that the e¤ectiveness of labor market in-
tervention are strictly related to the strength of union. When unions are initially
very strong, he …nds that regulation increases only the workers’ pro…t share and
has no impact on employment and growth. Instead, when union power is initially
low, labour market regulation decreases employment and current consumption
but fosters economic growth. The mechanism leading the positive impact on the
growth performance relies on the …rms’ need to escape the raise in the labor cost
through R&D-based productivity gains.
Finally, Nakajima (2006) examine the relationship between indeterminacy
and unemployment insurance. The framework adopted is that of the one-sector
neoclassical growth model except that the workers e¤ort is imperfectly observable
by …rms. He shows that the less unemployment insurance is, the more likely equi-
librium is to be indeterminate. In terms of growth and unemployment though,
the paper is silent and does not bring the reader to a clear conclusion. In fact,
reading between the lines of the main propositions of the paper, no clear-cut
result emerges. The interesting aspects of the Nakajima’s contributions lays on
the extension of the Alexopoulos (2004) version of the e¢ciency-wages model to
a growing, although exogenously, economy.
3 The model economy
The model is set in continuous time. The production side of the economy consists
of three sectors: a …nal-good sector, an intermediate-goods sector, and a research
sector. The …nal-good sector produces a single homogeneous output that is
used only for consumption. The intermediate sector consists of a continuum of
industries, indexed by i 2 [0; 1] ; each one producing with vertically di¤erentiated
production process. The …nal-good output is the numeraire of the model.
Technological progress entails improvement in labor productivity, which in
turn rises total factor productivity in …nal output sector. In each industry i
6
7. …rms are distinguished by the vintage of technology they use to produce the ith
intermediate. We denote the vintage of technology used by the ith industry at
time t by j (i; t), with higher values of the index j denoting more e¢cient pro-
duction technology. To learn how to introduce the j+1 vintage, …rms participate
in innovative R&D races. In general, the discoverer of the j + 1 vintage gets an
everlasting patent protection that makes him to be the unique allowed to freely
use it.
Labor is the only factor used in all production activities as well as research.
In contrast to standard Schumpeterian literature, we assume the presence of a
detecting technology that prevents …rms to monitoring workers’ and researchers’
e¤ort perfectly. Over time, GDP improves as innovations push upwardly the
technology frontier. We focus on the steady-state equilibrium.
3.1 Consumers and workers
At each instant of time, the economy is populated by a continuum N(t) of
identical, in…nitely-lived consumers/workers who dislike putting e¤ort. Popu-
lation grows over time at an exogenous rate n, so that at each point in time t;
the size of total population is N(t) = N (0) ent. Consumers are either employed
or unemployed. When employed, workers can decide to either exert e¤ort or
not depending on the level of the current wage o¤ered by …rms. We assume that
…rms cannot perfectly monitoring workers’ e¤ort and that monitoring technology
is such that there exists an exogenous probability q 2 [0; 1] that a worker engaged
in shirking is caught and …red. To avoid …ring, workers must exert e¤ort but they
also derive some disutility. We model e¤ort " as a discrete variable depending of
whether the individuals decide to exert e¤ort (" = 1) or not (" = 0).
Individuals are allowed to save or borrow in the …nancial market. To simplify
the model, we assume that individuals are risk neutral with instantaneous utility
linear function of consumption c and e¤ort " , where > 0 is a measure of the
individual’s disutility in terms of …nal-output units. Denoting expectation at
time 0 by E0, the representative consumer/worker intertemporal utility function
reads:
U (c; ") E0
Z 1
0
e t
[c (t) " ] dt (1)
where > n denotes the subjective discount rate.
The intertemporal maximization problem consists of maximizing [1] subject
to intertemporal budget constraint:
7
8. A (t) + Z (t) =
Z 1
t
c ( ) e [R( ) R(t)]
d (2)
where A (t)
R 1
t a ( ) e [R( ) R(t)]d is the present value of the representative
consumer/worker’s …nancial assets at time t and Z (t)
R 1
t z ( ) e [R( ) R(t)]d
is the present value of labor income at time t; with a and z denoting the con-
sumer/worker’s …nancial assets and labor income respectively, and R( )
R
0 r (s)
ds is the cumulative interest rate up to time (with R0( ) = r ( ))
Labor income z depends on worker’s status. It might include either the
current wage rate w when employed or the unemployment bene…ts b when unem-
ployed, i.e., z = fw; bg.3 Let now assume that z evolves over time according to
two independent Poisson processes, qw and qb; governing, respectively, the process
of job destruction and that of job …nding. Following Wälde (1999) and Sonnewald
and Wälde (2006), the evolution of labor income z can then be represented by
the following stochastic di¤erential equation:
dz = (w b) dqw + (w b) dqb (3)
where (w b) represent the …nite jump-term of each Poisson process.
Poisson process, qw; measures how often a consumer/worker leaves the status
of employed owed to job destruction. It takes place at an exogenous rate I +
(1 ") q, where I denotes the rate of job destruction related to the economy-wide
process of innovation (i.e., creative destruction), and (1 ") q is that related to
the …rms’ monitoring technology. Similarly, Poisson process, qb; measures how
often a consumer/worker leaves the status of unemployed owed to job creation.
It takes place at an exogenous rate > 0 re‡ecting all the institutional char-
acteristics of the labor market such as, for instance, the employment protection
legislation, labor/product market regulations or local rigidities. Observe that
can also be interpreted as the probability of …nding a job at each instant of time
and 1= as the expected duration of the unemployment status.
3.1.1 The value function
In this section we resort to the stochastic dynamic programming to solve the
consumer’s intertemporal optimization program. The state space is described by
a and z. From [2] it is easy to verify that wealth evolves according to:
3
Throughout the analysis we exclude tax distortion by assuming lump-sum taxation to …n-
ance unemployment bene…t. Moreover, in order to index the unemployment bene…t, we also
assume that in the BGP it increases at the same rate as productivity.
8
9. da = [(r n) a + z c] dt (4)
As a result, the program consists of maximizing [1] subject to [3] and [4].
De…ning the value function by V (a; z), the Bellman equation takes the following
structure4:
V (a; z) = max
c;"
8
>
<
>
:
c " + Va [(r n) a + z c] +
+ [V (a; z + b w) V (a; z)] [I (t) + (1 ") q]
+ [V (a; z + w b) V (a; z)]
9
>
=
>
;
(5)
The …rst-order condition reads:
Va = 1 (6)
The economic rationale of [6] is the following. Current utility from a marginal
increase in consumption, i.e., uc (c; "), must equal future utility from a marginal
increase in wealth measured by the costate variable Va. With linear preferences,
the current utility of an additional unit of consumption equals one and [6] follows
straightforwardly.
Eq. [6] makes consumption a function of the state variable, c = c (a). As
a result, replacing control variable by their optimal values c (a), the maximized
Bellman equation reads:
V (a; z) = c (a) " + Va [(r n) a + z c (a)] (7)
+ [V (a; z + b w) V (a; z)] [I (t) + (1 ") q] +
+ [V (a; z + w b) V (a; z)]
Finally, in order to avoid bang-bang solution for the intertemporal consump-
tion problem, risk-neutral preferences implies r =
3.1.2 The no-shirking condition and the asset equations
Each worker selects its e¤ort level to maximize his expected life-time utility. This
means comparison of the utility from shirking with the utility of not shirking.
De…ne the present-discounted value of the expected income stream of an employed
4
The details of the analytical derivation of the Bellman equation are collected in Appendix
A.
9
10. worker by W V (a; w) and the present-discounted value of the expected income
stream of an unemployed worker by U V (a; b). For an employed worker the
probability of getting a job is nil (i.e., = 0) whereas that of loosing a job is
positive and equal to I + (1 ") q. Plugging r = and …rst order condition
[6] into [7], the present-discounted value of the expected income stream of an
employed worker (regardless of her tendency to shirk) can be described by the
asset equation:
W = w " + ( n) a + [I + q (1 ")] (U W) (8)
De…ne WS as the expected life-time utility of a shirking worker (i.e., Eq. [8]
when " = 0), and WNS as the expected life-time utility of a non-shirking worker
(i.e., Eq. [8] when " = 1). The worker will choose to shirk or not to shirk if and
only if WNS WS. This is the famous no-shirking condition (NSC) after Shapiro
and Stiglitz (1984) which says that the worker will choose to exert e¤ort if and
only if the wage rate is set high enough to discourage workers from shirking.
In order to get the e¤ort-enhancing wage rate of the economy, we compare the
worker lifetime utility for " = 1 and " = 0 and obtain the following no-shirking
condition (NSC):
w U ( n) a + ( + I + q) =q (9)
The economic intuition behind NSC [9] is easy gained. In presence of a penalty
associated with being caught shirking, individuals will choose not shirking if and
only if the ongoing wage rate is su¢ciently high to induce workers to exert e¤ort.
In such a situation, unemployment acts as a self-disciplining device: if after being
…red an individual could immediately be hired by another …rm, then U = WS
should hold and WNS WS should never be satis…ed. As a result, variable U is
a key variable leading …rms’ wage setting behavior.
Let’s now analyze the case of an unemployed worker. For an unemployed
worker the probability of loosing a job is nil (i.e., I + q (1 ") = 0) while that of
…nding a job is positive and equals : The present-discounted value of the income
stream can then be described by the following asset equation:
U = b + ( n) a + (W U) (10)
Finally, comparison of the lifetime utility of a non-shirking worker (i.e., Eq.
[8] with " = 1) with that of an unemployed worker (Eq. [10]) gives the following
10
11. aggregate NSC5:
w ^
w b + + ( + I + )
q
(11)
As usual for no-shirking models, aggregate NSC [11] can be taken as a measure
of labor supply. Observe that the e¤ort-enhancing wage rate, ^
w, is higher: (i)
the higher the unemployment bene…t, b, (ii) the higher the disutility of e¤ort in
terms of consumption, , (iii) the higher the rate of time preference , (iv) the
less e¢cient the monitoring technology, q, and (v) the higher the job turnover
(the sum of job …nding and job destruction I).
3.2 Production
Final output is produced under perfect competition. At every instant in time t,
…nal output producers ensemble all the available intermediate goods according
to the following constant returns to scale production function.
Y (t) exp
Z 1
0
ln [x (i; t)] di (12)
where Y (t) denotes the …nal output (or GDP) and x (i; t) is the quantity of the
ith intermediate used to produce the …nal output.
Each …nal output producer will choose x (i; t) to minimize costs. The solution
of this minimization problem leads to demand function
p (i; t) =
Y (t) P (t)
x (i; t)
(13)
where P (t) exp
nR 1
0 ln [p (i; t)] di
o
is the aggregate price index and p (i; t) is
the price of the ith intermediate at time t. Since we let the …nal-output ot be
the numeraire, in the remainder of the paper P (t) = 1 (i.e.,
R 1
0 ln [p (i; t)] di = 0)
always holds.
In the intermediate sectors, production technology is CRS and uses labor as
primary input according to:
x (i; t) = j(i;t)
LX (i; t) (14)
5
To get Eq. [11], solve [8] (when " = 1) and [10] for W and U. Then, plug U into [9] and
solve the resulting expression for w. The result is right Eq. [11].
11
12. where > 1 is the innovation-jump separating two consecutive technology vin-
tages, and LX (i; t) is the amount of workers hired by the ith industry at time
t:
According to [14], technological progress entails improvement in labor input,
which in turn rises total factor productivity in …nal outputs sector. As in the
Shapiro and Stiglitz’s (1984) framework, we assume that workers contribute one
unit of labor if they do not shirk, or nothing otherwise. We also assume that
when innovative …rms o¤er a wage packages given by [11], they do not need to
wait for …nding a worker; i.e., the time required for …nding a worker is nil.
Once an innovation occurs, the discoverer of the most productive process
become the market leader by displacing the previous incumbent. Each leader
compete à la Bertrand with unequal marginal cost depending on the techno-
logy index and the e¢ciency wage ^
w. Producing one unit of output implies a
marginal cost of ^
w (t) = j(i;t)
. As the quality leader of each industry i operates
with a downward-sloping price schedule given by [13], Bertrand competition leads
each technological leader to maximize her pro…t by limit pricing all the followers
present in the market. This is obtained by setting a price equal to the marginal
cost of the most e¢cient follower:6
p (i; t) =
^
w (t)
j(i;t)
(15)
By setting a price equal to [15], each quality leader captures the entire in-
dustry market and will perform a ‡ow of sells equal to x (i; t) = j(i;t) 1
Y (t) = ^
w (t) :7
According to [15], all leaders have the same pro…t ‡ow given by
(t) = 1
1
Y (t) (16)
whereas all followers cannot do better than exit the industry.
6
Observe that the limit pricing behavior summarized by [15] is source of asymmetry in the
size of …rms. As will be veri…ed later on in the paper, such a characteristic does not a¤ect the
symmetric structure of the BGP equilibrium.
7
It is worth-noting that no-shirking wage rate ^
w is not constant over time but grows at the
same rate as average productivity. As the chosen numeraire of the model is the …nal good and
R 1
0
ln [p (i; t)] di = 0 must hold at each instant t, taking logs and integrating between 0 and
1 Eq. [15], we get
R 1
0
ln [ ^
w (t)] di
R 1
0
ln
h
j(i;t)
i
di = 0, which in turn can be rewritten as
ln [ ^
w (t)] = It ln : At each instant t (not only in the BGP equilibrium) e¢ciency-wage ^
w (t)
grows at rate I ln .
12
13. 3.3 R&D Races
In each industry i there is free entry into R&D race and all …rms have the
same R&D technology. The instantaneous probability of innovation of a …rm
by time t + dt is I (i; t) dt whereas the probability of not having innovated is
1 I (i; t) dt. In contrast to standard Schumpeterian growth models (Grossman
and Helpman, 1991; Aghion and Howitt, 1992), we assume that R&D di¢culty
increases over time according to a di¢culty function K (t) and that the industry-
wide instantaneous probability of innovation at time t is:
I (i; t) =
LR (i; t)
aK (i; t)
(17)
where LR (i; t) is the industry-wide R&D employment at time t, K (i; t) is a
measure of the R&D di¢culty of industry i, and a > 0 is an exogenous parameter
measuring the productivity of R&D workers.
The K (i; t) expression in the denominator of [17] is not new to the endo-
genous growth literature and is intended to escape the ”scale e¤ect” critique
of Jones (1995). We assume that as the economy grows, K (i; t) increases over
time and innovating becomes more di¢cult. More speci…cally, throughout the
paper we assume that R&D di¢culty does not change between industries and
equals K (i; t) = N (t), where > 0 is an exogenous parameter governing R&D
di¢culty growth.8
Let v (i; t) denote the expected discounted pro…t for winning a R&D race
in industry i at time t. Each R&D …rm chooses its labor input to maximize
its expected pro…ts. Perfect competition then implies the following free entry
condition to hold
v (i; t)
(
a N (t) ^
w (t) if I (i; t) = 0
= a N (t) ^
w (t) if I (i; t) > 0
(18)
When [18] holds with equality, I (i; t) > 0 and …rms are globally indi¤erent
concerning how much labor to devote to R&D.
To …nance R&D, …rms issue equity claims on the ‡ow of pro…ts generated
by the innovation. Claims on particular …rms are risky assets which current
valuation is given by the stock market. At each point in time t, then, investors
8
The speci…cation adopted for K (t) can be justi…ed by saying that R&D di¢culty is pro-
portional to the size of global market because of the existence of organizational costs related
to product distribution (Dinopoulos and Segerstrom (1999)) or the existence of costs to protect
…rm’s intangible assets from misappropriations (Dinopoulos and Syropoulos (2006)).
13
14. must solve a portfolio allocation problem among shares in a variety of pro…t-
maximizing …rms and among riskless bonds. As there is a continuum of industries
and the returns to engaging in R&D races are independently distributed across
…rms and industries, the risk attached to every single equity is idiosyncratic and
each investor can completely diversify away risk by holding a diversi…ed portfolio
of stocks. Thus, over a time interval dt, the shareholder receives a dividend
(i; t) dt, and the value of the …rm appreciates by _
v (i; t) dt in each industry.
Because each quality leader is targeted by …rms conducting innovative R&D,
the shareholder su¤ers a loss of v(i; t) if further innovation occurs. This event
occurs with probability I(i; t)dt, whereas no innovation occurs with probability
1 I(i; t)dt. E¢cient …nancial markets make the expected rate of return from
holding a stock of a quality leader equals to the riskless rate of return r(t)dt
that can be obtained through complete diversi…cation. As a result, no arbitrage
condition into capital market requires:
(i; t)
v (i; t)
+
_
v (i; t)
v (i; t)
= + I (i; t) (19)
Plugging [16] into [19] and combining the result with [18] yields
^
w (t) a =
(1 1= ) y (t)
+ I n
(20)
where y (t) Y (t) =N (t) denotes the level of per capita GDP at time t, and
where, based on free-entry [18], we have used _
v(i;t)
v(i;t) =
_
L(t)
L(t) = n.
According to [20], the pro…ts earned by each leader (1 1= ) y (t) are ap-
propriately discounted using the interest rate n > 0 plus the instantaneous
probability I (t) of being driven out of business by further innovation. As Eq.
[20] holds for every i, in the rest of the paper we focus on a symmetric structure
in which both R&D di¢culty and innovation rate do not vary across industries.
3.4 The Economic growth
This model identi…es two possible sources of growth: productivity and manu-
facturing employment. Using [13] together with [15], each representative man-
ufacturing quality-leader employs the same measure of workers LX = Y= ^
w.
Plugging [14] into [12], the aggregate production function boils down to
ln Y (t) = ln (Lx) +
Z 1
0
ln
h
j(i;t)
i
di (21)
14
15. Since j (i; t) jumps up to j (i; t) +1 when an innovation occurs and the in-
novation rate I does not change across industries and over time, the growth per-
formance of the economy is completely described by the time evolution of the two
terms on the right-hand side of [21]. Following Grossman and Helpman (1991), we
know that the average productivity can be rewritten as
R 1
0 ln
h
j(i;t)
i
di = It log .
Di¤erentiation of [21] with respect to time gives:
Y
_
Y
Y
=
_
Lx
Lx
+ I ln (22)
According to [21], the growth rate of real GDP, Y ; equals the growth rate of
manufacturing employment _
Lx=Lx plus a term that is proportional to the overall
innovation rate of the economy, I:
3.5 The labor market
The labor market is perfectly competitive. De…ning the aggregate level of em-
ployment by L, the ‡ow of workers in the unemployment pool is given by IL
whereas that in the employment pool (both manufacturing and R&D) is given
by (N L). Accordingly, out of the BGP the di¤erential equation governing
how unemployment evolves over time reads:
_
u = I (1 u) u
where u (N L) =N stands for the current rate of unemployment of the eco-
nomy.
In the balanced-growth path equilibrium, the ‡ow in equals the ‡ow out (i.e.,
_
u = 0) and the unemployment rate is given by:
u =
I
I +
(23)
According to Eq. [23], the model rules out the presence of a trade-o¤ between
growth and unemployment. Indeed, given , a permanent increase in the BGP
rate of innovation I tends to increase both the BGP growth rate of real GDP,
Y (via Eq. [22]), and the BGP unemployment rate, u (via Eq. [23]).9 This
result di¤ers from that of Aghion and Howitt (1994) who …nd that a permanent
9
Cerisier and Postel-Vinay (1998) …nd the same result for the case of search model. With
respect to Mortensen and Pissarides (1995) and Aghion and Howitt (1994), in their model
the creative destruction e¤ect always dominates the capitalization e¤ect with the result that a
positive relationship between growth and unemployment always emerges in the long-run.
15
16. increase in the frequency of innovation leaves equilibrium unemployment rate
una¤ected.10
In order to get the aggregate labor demand we proceeds as follow. From the
previous section we know that each representative manufacturing quality-leader
employs the same measure of workers LX = Y= ^
w; while the representative R&D
…rm employs the same measure of researchers aI N (t) : With a unit measure of
industries, aggregate labor demand reads:
1 =
y
^
w
1
1 u
+
aI
1 u
(24)
Eq. [11] and [24] completely describe the labor market. To see this more in
depth, we substitute [23] for into [11] and get:11
^
w = b + + +
I
u q
(25)
Eq. [25] is downward-sloping and Eq. [24] is upward-sloping in (u; ^
w) space.
Given y and I, the intersection of these two curves gives the equilibrium pair of
wage and unemployment rate (see Figure 1).
Notice that as in Shapiro and Stiglitz (1984), this model is inconsistent with
full employment. To see that, suppose that = +1; i.e., each …red worker is
instantaneously hired by another …rm in either manufacturing or R&D. In such
a situation, workers are encouraged to shirk thereby forcing …rms to set a wage
rate equal to in…nity and reducing their labor demand. On the other hand, from
the point of view of …rms (regardless of whether it operates in manufacturing or
R&D) there is no gain in o¤ering wages lower than [11]. If a …rm o¤ered a lower
wage, workers would stop providing e¤ort and start shirking, with the result of
damaging the …rm through a drop in its overall productivity.
4 The Balanced-growth path equilibrium
In this section we analyze the BGP equilibrium properties of the model. In the
BGP the going wage rate is such that no worker choose to shirk, product markets
10
For the sake of truth, this result is akin to that of Aghion and Howitt for the sub-case of
exogenous growth with iso-elastic preferences. In presence of innovation-based growth though,
their results completely di¤ers from ours.
11
Observe that as ^
w at the same rate as average productivity, both b and grow at the
same rate I ln . As it will be cleared later on, this result makes the share of employment in
manufacturing (…rst term on the right-hand side of [24]) constant and allows us to study the
BGP properties of the model.
16
17. Figure 1: The equilibrium unemployment
clear and …rms invest in R&D. As the presence of moral hazard makes the going
wage rate to be higher than that of perfect competition, the model predicts a
positive unemployment rate in the BGP given by [23].
In the BGP the allocation of all resources to various activities remains …xed
over time; this implies that manufacturing employment must grow at the same
rate as population n (i.e., _
Lx=Lx = n) and that the growth rate of per capita GDP
y is also constant and completely pinned down by the BGP rate of innovation
_
y
y
= Y n = I ln (26)
The BGP equilibrium system consists of four equations: aggregate NSC [11],
no-arbitrage/ research equation [20], aggregate rate of unemployment, [23], ag-
gregate labor demand [24], and the di¤erential equation governing the growth rate
of GDP, [26]. The …ve endogenous variables are: the equilibrium e¤ort-enhancing
wage rate ^
w, the level of per capita GDP y, the BGP rate of unemployment u,
the growth rate of GDP Y , and the BGP rate of innovation I.
In order to reduce the dimension of the system, we proceed as follows. First,
we plug [11] and [23] into [20] and obtain the BGP research equation:
b + + ( + I + )
q
a =
1 1
y
+ I n
(27)
The right-hand side of [27] is related to the bene…t (in terms of expected
discounted pro…ts) from innovating while the left-hand side is related to the cost
17
18. of innovation. The bene…t from innovating increases when y increases (the per
capita GDP increases), when decreases (future pro…ts are discounted less), and
when I decreases (the quality leader is less threatened by further innovation). The
cost of innovation increases when both a and increase (innovative R&D becomes
relatively more di¢cult or the productivity of individual researcher decreases),
when and b increase (the disutility of working in terms of consumption as well
as the opportunity cost of being exerting e¤ort increase), when and I increase
(labor turnover increase), and when q decreases (monitoring technology becomes
less e¢cient in caching shirkers).
Next, we plug [11] and [23] into [24] and get BGP labor market constraint:
I +
= aI +
y
h
b + + ( + I + ) q
i (28)
Eq. [28] has a natural economic interpretation. The left-hand side is the
employment rate of the economy while the two terms on the right-hand side
are, respectively, the share of the employment in R&D and the share of employ-
ment in manufacturing. The manufacturing employment share increases when
y increases (the per capita GDP increases), when decreases (the productivity
gain from innovating decreases), when and b decrease (the disutility of work-
ing as well as the opportunity cost of exerting e¤ort decrease), when and I
decrease (labor turnover decrease), and when q increases (monitoring technology
improves). The R&D employment share increases when I increases (BGP R&D
intensity increases), and when both a and increase (R&D becomes relatively
more di¢cult or the productivity of individual researcher decreases).
As shown in Figure 2.2, Eq. [27] (RE-curve in the graph) is downward-sloping
while [28] (LM-curve in the graph) is upward-sloping in (I; y) space.12 In order
to ensure the existence of a positive BGP equilibrium, we impose the following
restriction on the subjective discount rate:
< ~1 n +
1
a
implying that the vertical intercept of the RE-curve is higher than that of the
LM-curve.
The BGP equilibrium consists of the intersection of the curves in the positive
orthant (point A in Figure 2.2).
12
See Appendix A for an analytical demonstration.
18
19. Figure 2: The BGP equilibrium
Proposition 1 When the subjective discount rate is not too high (i.e., when
< n + ( 1) =a holds), there exists a BGP equilibrium in which per capita
GDP y, innovation rate I , and unemployment rate u are positive and constant,
and where individuals have no incentive to shirk.
Proof. See Appendix B.
According to Proposition 3, a BGP equilibrium exists only in the case in
which individuals’ subjective discount rate is not too high. In the remainder
of the paper we will show some comparative statics properties of the model by
restricting our attention to the special case in which < ~1 holds.
5 Improving labor market performance
In this section we restrict attention to analyzing the BGP e¤ects of improving
the job market performance. An increase in the job market performance can be
seen through an increase in the rate of job …nding . The comparative statics
results are displayed by Figure 2.3. Starting from BGP A, a permanent increase
in shifts the BGP labor market constraint, LM, to the right and the BGP
research equation, RE, to the left. The new BGP equilibrium is now represented
by point B (see Figure 2.3).
As improving job market performance has a positive impact on per capita
19
20. Figure 3: The BGP comparative statics
GDP, the …nal e¤ect on the BGP rate of innovation is ambiguous and depends
on whether the LM curve is able of shifting more than the RE curve. In Ap-
pendix B.1 we show that this result crucially depends on the size of the subjective
discount rate . In order to see that more in depth, de…ne13
~2 n I +
( 1)
a ( + I)
When < ~2 holds, an increase in increases the BGP growth rate of the
economy Y via a permanent increase in the BGP rate of innovation I. When
> ~2 holds, an increase in decreases the BGP growth rate of the economy Y
via a permanent fall in the BGP innovation rate I.
Proposition 2 For the economy in the BGP, an increase in the rate of job
…nding has a positive impact on BGP per capita GDP y and an ambiguous
impact on the BGP growth rate of the economy Y , that depends on the size of
the subjective discount rate . In particular, (i) when 2 (n; ~2) an increase in
increases the BGP growth rate of the economy Y , and (ii) when 2 (~2; ~1)
an increase in decreases the BGP growth rate of the economy Y
Proof. See Appendix C.1
13
Observe that threshold ~2 is never larger that ~1 when I > 0.
20
21. The economic intuition behind Proposition 4 is not di¢cult to grasp. An
increase in reduces unemployment duration with the result that …red workers
can more easily be rehired when caught shirking. This forces …rms to o¤er higher
wages in order to discourage workers from shirking. The raised e¢ciency wage ^
w
has a twofold e¤ect on R&D e¤ort. On the one hand, increased ^
w has a negative
impact on R&D investment owed to a permanent increase in the cost of innovation
(left-hand side of [27]). On the other, an increase in ^
w makes employed workers
to enjoy an increased stream of current income which results, in presence of risk-
neutral preferences, in a quick increase in the level of per capita consumption.
This has a positive impact on R&D via a permanent increase in the expected
bene…t of innovation (right-hand side of [27]). However, an equilibrium with
a positive innovation rate requires that free-entry [18] must hold with equality.
The BGP innovation rate must then adjust in order to warrant the equilibrium
between the cost and the bene…t of R&D (the denominator of the ratio on the
right-hand side of [20]).
Obviously, the direction of such a change is not unique and turns out to
depend on the size of the discount factor. When is relatively small (i.e., < ~2),
the e¤ective discount rate is too low and the expected bene…t exceeds the cost
of innovation. The rate of innovation has then to raise in order to re-establish
equilibrium into free-entry condition [18]. Unlike, when is relatively large (i.e.,
> ~2) and the e¤ective discount rate is too high, the expected cost exceeds
the bene…t of innovation. The rate of innovation has then to fall in order to
re-establish the equilibrium into free-entry condition [18].
As far as the BGP unemployment rate is concerned, from [23] it is easy to see
that an increase in the job-…nding rate a¤ects u both directly, through parameter
; and indirectly through the BGP rate of creative destruction, I. Di¤erentiation
of [23] with respect to gives:
du
d
=
1
(I + )2
dI
d
I =
I
(I + )2 ( 1)
where (dI=d ) ( =I) denotes the elasticity of I with respect to .
As is easy to check, an increase in has a mixed e¤ect on the equilibrium
unemployment rate depending on whether is either lower or larger than one.
Indeed, when the economy is impatient (i.e., > ~2) and dI=d < 0, < 0 and
the economy shifts towards a new BGP equilibrium with a lower unemployment
rate. Unlike, when the economy is patient (i.e., < ~2) and dI=d > 0; the …nal
e¤ect of an increase in the rate of job …nding is ambiguous and depends on the
21
22. size of ; i.e., on whether elasticity is either lower or larger than one.
Proposition 3 For the economy in the BGP, improving labor market perform-
ance has mixed e¤ects on the equilibrium unemployment rate that depends on
both the size of the subjective discount rate and how BGP innovation rate I
reacts to changes in .
Proof. See Appendix C.1
The economic intuition of Proposition 5 is not di¢cult to grasp. When > 1,
improving the labor market performance induces a large increase in the BGP rate
of creative destruction. This reduces the life-span of the …rm by more than the
duration of unemployment. As a result, the ‡ow in the unemployment pool,
I (1 u), is stronger than that in the employment pool, u; so that equilibrium
unemployment raises in the new BGP. Unlike, when < 1 improving the labor
market performance induces a small increase in the BGP rate of creative de-
struction. The reduction in the expected life-span of …rms is now smaller than
the duration of unemployment. As a consequence, the ‡ow in the unemployment
pool, I (1 u), is not able to overwhelm that in the employment pool, u; lead-
ing the economy toward a new BGP with a reduced equilibrium unemployment
rate.
6 Unemployment bene…t
Let’s now analyze the BGP e¤ects of a permanent increase in the unemploy-
ment bene…t, b. Graphically, this comparative statics exercise leads to the same
scenario described by Figure 2.3. Starting from the BGP equilibrium, A, a per-
manent increase in shifts the BGP labor market constraint, LM, to the left and
the BGP research equation, RE, to the right. In the new BGP equilibrium, B,
per capita BGP y have risen, whereas the rate of innovation can either increase
or decrease depending, once again, on whether the subjective discount rate is
larger or lower than the threshold ~2:14
Proposition 4 For the economy in the BGP, an increase in the unemployment
bene…t b has a positive impact on BGP per capita GDP y and an ambiguous
impact on the BGP growth rate of the economy Y . More speci…cally, (i) when
2 (n; ~2) an increase in b leads to an increase in the BGP growth rate of the
14
The analitical details are collected by Appendix C.2.
22
23. economy Y , and (ii) when 2 (~2; ~1) an increase in b leads to a decrease in
the BGP growth rate of the economy Y
Proof. See Appendix C.2
The economic explanation of the results showed by Proposition 6 is easy
gained and relies on the existence of moral hazard in job relationships. Given
Eq. [11], an increase in b generates a permanent increase in the e¤ort-enhancing
wage rate, ^
w. In the presence of ine¢cient monitoring technology, an increase in
b represents an increase in the workers outside-option; in order to maintain the
workers’ incentive to exert e¤ort, …rms cannot do better than o¤ering an higher
wage rate, thereby raising both the cost and the bene…t of R&D. The remaining
explanation goes back over that of the previous section, so we skip it and focus
on the BGP unemployment rate.
Di¤erentiation of [23] with respect to gives:
du
d
=
(I + )2
dI
db
As is easy checkable, the only impact a¤ecting equilibrium unemployment
rate is that coming from changes in the BGP innovation rate. Indeed, whatever
the e¤ect of increasing the unemployment bene…t b on the BGP innovation rate
I is, the …nal impact on the equilibrium unemployment rate is always strictly
related to. This means that when consumers are impatient, higher unemployment
bene…ts have a positive impact on growth and unemployment; on contrary, when
consumers are patient, higher unemployment bene…t have a negative impact on
growth and unemployment.
7 Conclusion
In this paper we addressed the issue of growth and unemployment through an
innovation-based endogenous growth model with e¢ciency-wages. On a posit-
ive standpoint, we pointed out that there always exists a positive relationship
between growth and unemployment, whereas, from a normative standpoint, we
showed how labor market reforms can lead to mixed results.
Speci…cally, reforms aimed at improving the labor market performance, mainly
in terms of either improving job …nding rate or increasing unemployment bene…t,
crucially depend on how individuals discount future income. For the case of an
impatient economy, we found that improving either labor market performance
23
24. or unemployment bene…t turns out to induce a permanent fall in both the BGP
innovation rate and the equilibrium unemployment rate.
For the case of a patient economy, improving both labor market performance
and unemployment induces a permanent increase in the BGP innovation rate
but has mixed e¤ects on the equilibrium unemployment rate. For reforms aimed
at improving job market performance, the …nal e¤ect on employment depends
on the elasticity of innovation with respect to changes in the job …nding rate.
Speci…cally, when the response of the innovation rate to such reforms is high,
the equilibrium unemployment rate turns out to increase in the new BGP. On
contrary, when the response is low, the economy turns out to converge towards
a new BGP with a lower equilibrium unemployment rate. For reforms aimed
at improving unemployed worker’s income, the …nal e¤ect on equilibrium unem-
ployment follows that on the innovation rate and is strictly related to the size of
the rate of impatience of the economy.
24
25. Appendix A
Derivation of the Bellman Equation
This Appendix provides the analytical details of the derivation of the Bellman
equation. De…ne the value function by V (a; z). Based on Sennewald and Wälde
(2006) and Sennewald (2007), the Bellman equation takes the following structure:
V (a; z) = max
c;"
c (t) " +
1
dt
Et [dV (a; z)] (A.1)
The change of V (a; z) is given by
dV (a; z) = Va (ra + z c) dt + [V (a; z + b w) V (a; z)] dqw +
[V (a; z + w b) V (a; z)] dqb
where Vi @V (a; z) =@i with i = fa; zg.
According to [A.1], in the presence of two independent Poisson processes the
change of V (a; z) can be split in two terms: the ”normal term” (…rst term on the
right-hand side) and the ”jump terms” (last two terms on the right-hand side).
Forming expectations on [A.1] gives:
Et [dV (a; z)] = Va (ra + z c) dt + (A.2)
+ [V (a; z + b w) V (a; z)] [I (t) + (1 ") q] dt +
+ [V (a; z + w b) V (a; z)] dt
Insertion of [A.2] into the Bellman equation [A.1] gives [5].
Appendix B
The steady-state equilibrium
Rewrite the BGP equilibrium system as
y b + + ( + I + )
q
a ( + I n)
1
= 0
and
y b + + ( + I + )
q
( + I) a I
( + I)
= 0
25
26. Di¤erentiation with respect to y and i gives:
dy
dI Labor
= a
(2 + 2I n + q + ) + bq
q ( 1)
> 0
and
dy
dI R&D
=
n
bq + ( + q) + a q (I + )2
[b + ( + q + 2I + ) =q]
o
q (I + )2 < 0
respectively.
Labor market/NSC [27] is an upward-sloping curve and the no-arbitrage equa-
tion [28] is downward-sloping in (y; I) space. A BGP equilibrium exists if and
only if < n + 1
a ; i.e., if the vertical intercept of the LM curve is lower than
that of the RE curve.
Appendix C
Comparative Statics
C.1. Labor market frictions
Rewrite Eqs.[11], [20] and [24] as follows
F1
(y; I; ^
w; ; b) ^
w b + + ( + I + )
q
F2
(y; I; ^
w; ; b) ^
wa
(1 1= ) y (t)
+ I n
F3
(y; I; ^
w; ; b) 1
y
^
w
+ aI
+ I
Di¤erentiation of with respect to the three endogenous variables fy; I; wg and
the …nding rate yields:
2
6
4
dy
d
dI
d
dw
d
3
7
5 =
2
6
4
q
0
wI
(I+ )2
3
7
5
where
26
27. 2
6
6
4
0 q 1
1 aw
1
a ( +I n)
1
1
w [ +a (I+ )2
]
(I+ )2 1 aI I
I+
3
7
7
5
The determinant of the Jacobian reads:
j j =
q + I
qw
I
+
a [qw + ( + I n) ]
1
As in the BGP w > (I + ) =q, otherwise workers would shirk, the determ-
inant of the Jacobian is positive; i.e. j j > 0:
Using Cramer rule yields:
dy
d
=
1
j j
aw 2
fwIq + (I + ) [I + + (I + a I + a ) ( n)] g
q ( 1) (I + )2 > 0
dI
d
=
1
j j
fqIw ( 1) + (I + ) [ ( 1) a (I + ) ( + I n)]g
q ( 1) (I + )2 R 0
and
dw
d
=
1
j j
w f( 1) + a (I + )g
q ( 1) (I + )
> 0
The sign of dI
d is not clear-cut and turns out to depend on the sign of the
term in the squared brackets. Solving for gives:
dI
d
R 0 , Q ~2 n I +
( 1)
a (I + )
For very small (or far from ~2) the impact on I is positive and vice versa.
C.2. Unemployment bene…t
Di¤erentiation with respect to the three endogenous variables fy; I; wg and the
parameter measuring the unemployment bene…t b yields:
2
6
4
dy
db
dI
db
dw
db
3
7
5 =
2
6
4
1
0
0
3
7
5
Using Cramer rule yields:
27
28. dy
db
=
1
j j
aw 2
h
a (I + )2
( n) + ( + 2I + n)
i
( 1) (I + )2 > 0
dI
db
=
1
j j
[( 1) + a (I + ) ( + I n)]
( 1) (I + )
R 0
and
dw
db
=
1
j j
w
h
( 1) + a (I + )2
i
( 1) (I + )2 > 0
Once again, the sign of dI
d is ambiguous and related to subjective discount
rate . Indeed, it is easy to check that dI
d R 0 if and only if Q ~.
28
29. References
[1] Acemoglu, D. (1997), Technology, unemployment and e¢ciency. European
Economic Review, 41, pp. 525-533.
[2] Aghion, P. and P. Howitt (1994), Growth and unemployment”. Review of
Economic Studies. 61, 477-494.
[3] Aricò, F. (2003), Growth and unemployment: Towards a theoretical integ-
ration. Journal of Economic Survey, vol. 17 (3), pp. 419-455.
[4] Bean, C. and C. Pissarides (1993). Unemployment, Consumption and
Growth. European Economic Review, 37, pp.837-854.
[5] Caballero, R. (1993), Comment on Bean and Pissarides. European Economic
Review, 37: 855-859.
[6] Cahuc P., Michel P., (1996). Minimum Wage, Unemployment and Growth.
European Economic Review, 40, pp.1463-1482.
[7] Cerisier, F. and Postel-Vinay, F. (1998). Endogenous growth and the labor
market. Annales d’Economie et de Statistique, 49/50, pp.105-130.
[8] Danthine, J.-P., and J. B. Donaldson (1995), Non-Walrasian Economies,
in T. F. Cooley, ed., Frontiers of Business Cycle Research, Princeton, NJ:
Princeton University Press.
[9] Daveri, F. and G. Tabellini, (2000). Unemployment, Growth and Taxation
in Industrial Countries, Economic Policy, 30, pp. 47-88.
[10] Dinopoulos, E. and Segerstrom, P. (1999), A Schumpeterian model of pro-
tection and relative wages. American Economic Review Vol.89, pp.450-472.
[11] Dinopoulos, E. and C. Syropoulos (2006), Rent Protection as a Barrier to
Innovation and Growth. forthcoming, Economic Theory.
[12] Gomme, P. (1999), ”Shirking, Unemployment and Aggregate Fluctuations”.
International Economic Review 40, pp.321-48.
29
30. [13] Gordon, Robert J. (1995). Is There a Trade-o¤ between Unemployment and
Productivity Growth? in D. Snower and G. de la Dehesa, eds., Unemploy-
ment Policy: Government Options for the Labour Market. (Cambridge UK:
Cambridge University Press, 1997), pp. 433-63.
[14] Grossman, G. M. and E. Helpman (1991a), ”Quality Ladders and Product
Cycles”. Quarterly Journal of Economics, 106, May, pp. 557-586.
[15] Hoon, H. T., and E. S. Phelps (1997), ”Growth, Wealth, and the Natural
Rate: Is Europe’s Job Crisis and Growth Crisis?”. European Economic Re-
view, 41: 549-557.
[16] Jones, C. (1995), Time Series Tests of Endogenous Growth Models. The
Quarterly Journal of Economics, vol.110, Issus 2, pp. 495-525;
[17] Mortensen D. T., and Pissarides C. A. (1998), ”Technological Progress, Job
Creation and Job Destruction”. Review of Economic Dynamics, 1; pp.733-
753.
[18] Muscatelli, V.A. and P. Tirelli (2001), Unemployment and Growth: Some
Empirical Evidence from Structural Time Series Models. Journal of Applied
Econometrics, 33; 1083-88.
[19] Palokangas, T. (2003). “Labour Market Regulation, Productivity-Improving
R&D and Endogenous Growth”. IZA Discussion Papers No. 720.
[20] Peretto, G. (2000), Market power, growth and unemployment. Mimeo. Duke
University, Durham.
[21] Phelps, E. S. (1994), Structural Slump: The modern equilibrium theory of
unemployment, interest and assets. Harvard University Press. Cambridge,
MA.
[22] Pissarides, C.A. (1990). Equilibrium Unemployment Theory, Oxford, UK:
Basil Blackwell.
[23] Postel-Vinay, F. (1998), Transitional Dynamics of the Search Model with
Endogenous Growth. Journal of Economic Dynamics and Control, Vol. 22,
pp.1091-1115.
[24] Shapiro, C. and J. Stiglitz (1984). Involuntary unemployment as a worker
discipline device. American Economic Review, Vol.74, pp. 433-444.
30
31. [25] Sennewald, K. (2007), “Controlled Stochastic Di¤erential Equations under
Poisson Uncertainty and with Unbounded Utility”. Journal of Economic
Dynamics and Control, Vol. 31, pp. 1106-1131.
[26] Sonnewald, K. and K. Wälde (2006), .”Ito’s Lemma” and the Bellman equa-
tion for Poisson processes: An applied view”. Journal of Economics, Vol. 89,
pp. 1-36.
[27] Wälde, K. (1999), ”Optimal saving under Poisson uncertainty”. Journal of
Economic Theory 87, pp. 194 217.
[28] Van Schaik, A.B.T.M. and H.L.F. De Groot, (1998) Unemployment and
Endogenous Growth. Labour, 12, pp. 189-219.
31