DP577 | Growth and Unemployment

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This paper examines the long-run effects of growth on unemployment. It assumes that growth arises explicitly from the introduction of new technologies, which require labour re-allocation for their implementation. Using a variant of the search theory developed by Pissarides, the paper shows how unemployment is affected by growth both directly, through the job-destruction rate, and indirectly through its effects on the incentive for firms to create job openings. Our results can be summarized as follows: first, the sign of the overall effect of growth on unemployment depends upon its source (more growth can result from an increase in either the size or the frequency of innovations, from human capital accumulation through learning-by-doing etc.); second, the size and sign of the overall effect of growth on unemployment depends upon the degree of complementarity in demand across consumption, at different points in time and across sectors at a given point in time. Finally, endogenizing the growth process (through, for example, endogenizing the research activities that determine the size and frequency of innovations or through introducing learning by doing with positive external effects across sectors) introduces new interactions between growth and unemployment. It also creates the possibility of multiple equilibria and gives rise to a role for government intervention.