DP1856 | Learning for Employment, Innovating for Growth

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We present a model in which workers have to be educated to get employed and firms have to innovate in order to increase productivity. Education as well as innovation and production require skilled labour as inputs. This and the fact that learning opportunities differ across workers determine simultaneously the long-run level of employment and the long-run rate of growth. We study the impact of changes in the education of workers and the incentives to innovate. Lower profits imply lower growth rates but not necessarily less employment. The effects of redistributive policy measures among workers depend on the form of redistribution. Subsidization of education increases employment and growth. Redistribution through the tax and benefit system or social net has the opposite effect.