Relative Productivity and Search Unemployment in an Open Economy

in Journal of Economic Dynamics and Control (2020), 117

Using a panel of eighteen OECD countries, we find empirically that the long-run effects of higher productivity of tradables relative to non-tradables vary across time, space and stages of the business ... [more ▼]

Using a panel of eighteen OECD countries, we find empirically that the long-run effects of higher productivity of tradables relative to non-tradables vary across time, space and stages of the business cycle. More specifically, our evidence reveals that elasticities of the relative wage and relative price of non-tradables with respect to relative productivity of tradables increase over time. Our estimates also show that the fall in the relative wage is more pronounced whilst the appreciation in the relative price is less in countries where labor markets are more regulated and during periods of recession. To rationalize the evidence, we differentiate between labor mobility costs caused by job search efforts and hiring costs resulting from search frictions in the labor market in a two-sector open economy model. While time-declining labor mobility costs can account for the time-increasing effects of a productivity differential, international differences in labor market regulation and variations of hiring costs across the business cycle, respectively, can rationalize the cross-country and state-dependent effects we estimate empirically. Finally, labor market frictions have important implications for sectoral unemployment since labor mobility and hiring costs bias labor demand toward the traded sector which results in a greater decline in unemployment in tradables relative to unemployment in non-tradables following higher relative productivity. [less ▲]

Population, Pensions, and Endogenous Economic Growth

in Journal of Economic Dynamics and Control (2014), 46

We study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of the pension scheme ... [more ▼]

We study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of the pension scheme. When labor is scarcer it becomes more expensive and innovation investments that increase labor productivity are more profitable. We incorporate this channel in a new dynamic general equilibrium model with endogenous economic growth and heterogeneous overlapping generations. We calibrate the model for the US economy and obtain the following results. First, the effect of a decline in population growth on labor productivity growth is positive and quantitatively significant. In our benchmark, it is predicted to increase from an average annual growth rate of 1.74% over 1990–2000 to 2.41% in 2100. Second, institutional characteristics of the pension system matter both for the growth performance and for individual welfare. Third, the assessment of pension reform proposals may depend on whether economic growth is endogenous or exogenous. [less ▲]

Aging and Pensions in General Equilibrium: Labour Market Imperfections Matter

in Journal of Economic Dynamics and Control (2013), 37

We re-examine the effects of population aging and pension reforms in an OLG model with labor market frictions. The most important feature brought about by labor market frictions is the connection between ... [more ▼]

We re-examine the effects of population aging and pension reforms in an OLG model with labor market frictions. The most important feature brought about by labor market frictions is the connection between the interest rate and the unemployment rate. Exogenous shocks (such as aging) leading to lower interest rates also imply lower equilibrium unemployment rates, because lower capital costs stimulate labor demand and induce firms to advertise more vacancies. These effects may be reinforced by increases in the participation rate of older workers, induced by the higher wage rates and the larger probability of finding a job. These results imply that neglecting labor market frictions and employment rate dynamics may seriously bias the evaluation of pension reforms when they have an impact on the equilibrium interest rate. [less ▲]

Steady-State Growth and the Elasticity of Substitution

in Journal of Economic Dynamics and Control (2011), 35

In a neoclassical economy with endogenous capital- and labor-augmenting technical change the steady-state growth rate of output per worker is shown to increase in the elasticity of substitution between ... [more ▼]

In a neoclassical economy with endogenous capital- and labor-augmenting technical change the steady-state growth rate of output per worker is shown to increase in the elasticity of substitution between capital and labor. This confirms the assessment of Klump and de La Grandville (2000) that a greater elasticity of substitution allows for faster of economic growth. However, unlike their findings my result applies to the steady-state growth rate. Moreover, it does not hinge on particular assumptions on how aggregate savings come about. It holds for any household sector allowing savings to grow at the same rate as aggregate output. Download Info [less ▲]

Foreign direct investment under international competition : Control of Spillover ?

in Journal of Economic Dynamics and Control (2010)

In this paper we present a dynamic model of a firm which is deciding whether to outsource parts of its production to a less developed economy where wages and the level of technology are lower. Outsourcing ... [more ▼]

In this paper we present a dynamic model of a firm which is deciding whether to outsource parts of its production to a less developed economy where wages and the level of technology are lower. Outsourcing reduces production costs but is associated with spillovers to foreign potential competitors. Spillovers over time increase productivity of firms in the foreign country and make them stronger competitors on the common market. The paper analyzes the inter-temporally optimal behavior of the firm and shows that two outcomes are possible in the long-run. One outcome is that there is one steady state where the firm invests a positive amount in the foreign country and the other outcome is a continuum of steady states with no investment. The paper then derives conditions such that it is optimal for the firm to invest in the foreign country and characterizes different types of optimal dynamic investment patterns. In addition, using numerical dynamic optimization methods, the effect of the speed of technology adoption and of the wage differential on total labor income in the home country is studied taking into account the transition dynamics. [less ▲]

Extensive and intensive growth in a neoclassical framework

in Journal of Economic Dynamics and Control (2005), 29(8), 1427-1448

Extensive growth based on the expansion of inputs is likely to be subject to diminishing returns. Therefore it is often viewed as having no effect on per capita magnitudes in the long run. This Paper ... [more ▼]

Extensive growth based on the expansion of inputs is likely to be subject to diminishing returns. Therefore it is often viewed as having no effect on per capita magnitudes in the long run. This Paper argues that periods of extensive growth through capital accumulation may be a precursor to periods of intensive growth during which output per unit of input grows through endogenous technical change. Such a sequence of stages of development occurs as capital accumulation affects the incentives to engage in labour-saving technical change. A steady rise in the capital-labour ratio affects the relative scarcity of factors of production, their (expected) relative price, and induces innovation investments.<P>(This abstract was borrowed from another version of this item.) [less ▲]

Capacity Utilization and Market Power

in Journal of Economic Dynamics and Control (1997), 22

We propose a theoretical macroeconomic model where capacity underutilization follows from idiosyncratic demand uncertainty at the time monopolistic firms must choose their productive capacity. After their ... [more ▼]

We propose a theoretical macroeconomic model where capacity underutilization follows from idiosyncratic demand uncertainty at the time monopolistic firms must choose their productive capacity. After their investment decision, firms facing a low demand will typically prefer to run excess capacities rather than reduce their profit margin; firms at full capacity will respond to demand fluctuations solely by price adjustments. We show that the proportion of firms with idle capacities influences crucially the short-run response of the economy to exogenous disturbances and, in particular, the relative importance of price and quantity adjustments. [less ▲]