Unemployment and Innovation Patterns: The Critical Role of Coordination

Abstract

This paper explores cross-country differences in unemployment and innovation patterns from the perspective of "comparative institutional analysis." A generalized efficiency wage model is proposed for the determination of equilibrium unemployment and innovation within two alternative scenarios: firms coordinating through either market mechanisms or social networks. The mode of coordination is shown to affect firms' choices of either radical or incremental innovations and their responses to competitive pressure. Higher unemployment may result as a consequence of specialization along innovation trajectories that increase job precariousness.