Working Paper: CEPR ID: DP5026
Authors: Andreas Hornstein; Per Krusell; Giovanni L. Violante
Abstract: We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labour market. We distinguish between two polar cases studied in the literature: a ?creative destruction? economy where new machines enter chiefly through new matches, and an ?upgrading? economy where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light of the fact that, in the model calibrated to the US economy, both unemployment and vacancy durations are very short, i.e., the matching frictions are quantitatively minor. Hence, the equilibrium allocations of the model are remarkably close to those of a frictionless version of our economy where firms are indifferent between upgrading and creative destruction, and where every worker is paid the same market-clearing wage. These results are robust to extensions of the benchmark model that incorporate machine-specific and match-specific heterogeneity.
Keywords: Creative destruction; Inequality; Technical change; Unemployment; Upgrading
JEL Codes: J41; J64; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Technological change (O33) | Wage inequality (J31) |
| Creative destruction (O39) | Increased unemployment (J64) |
| Upgrading (Y60) | Decreased unemployment (J68) |