Technology-Policy Interaction in Frictional Labor Markets

49 Pages Posted: 7 Dec 2012

See all articles by Andreas Hornstein

Andreas Hornstein

Federal Reserve Bank of Richmond

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Giovanni L. Violante

New York University, Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: November 1, 2006

Abstract

Does capital-embodied technological change play an important role in shaping labor market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labor demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labor market regulation — we analyze unemployment benefits, payroll and income taxes, and firing costs — exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labor market experience, relative to that of the United States: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labor share. A calibrated version of our model suggests that this technology-policy interaction could explain a sizeable fraction of the observed differences between the United States and Europe.

Keywords: embodied technical change, vintage capital, search, labor market policies, unemployment

JEL Classification: E13, E22, E24, J64, O33

Suggested Citation

Hornstein, Andreas and Krusell, Per L. and Violante, Giovanni L., Technology-Policy Interaction in Frictional Labor Markets (November 1, 2006). FRB Richmond Working Paper No. 06-10. Available at SSRN: https://ssrn.com/abstract=2186155 or http://dx.doi.org/10.2139/ssrn.2186155

Andreas Hornstein (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

Per L. Krusell

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ
United States
609-258-4003 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 0 8 16 30 73 (Phone)
+46 0 8 16 41 77 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giovanni L. Violante

New York University, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-992-9771 (Phone)
212-995-4186 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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