Technology-Policy Interaction in Frictional Labor Markets
49 Pages Posted: 7 Dec 2012
Date Written: November 1, 2006
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
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