Working Paper: NBER ID: w4768
Authors: Ricardo J. Caballero; Mohamad L. Hammour
Abstract: This paper analyzes the timing, pace and efficiency of the on- going job reallocation that results from product and process innovation. There are strong reasons why an efficient economy ought to concentrate both job creation and destruction during cyclical downturns, when the opportunity cost of reallocation is lowest. Malfunctioning labor markets can disrupt this synchronized pattern and decouple creation and destruction. Moreover, irrespective of whether workers are too strong or too weak, labor market inefficiencies generally lead to technological 'sclerosis,' characterized by excessively slow renovation. Government incentives to production may alleviate high unemployment in this economy, but at the cost of exacerbating sclerosis. Creation incentives, on the contrary, increase the pace of reallocation. We show how an optimal combination of both types of policies can restore economic efficiency.
Keywords: creative destruction; job reallocation; market inefficiencies; government incentives
JEL Codes: O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor market inefficiencies (J48) | Disruption of synchronized job creation and destruction (J63) |
| Disruption of synchronized job creation and destruction (J63) | Technological sclerosis (O30) |
| Strong labor market conditions (J29) | Decoupling of job reallocation processes (J63) |
| Weak labor market conditions (J29) | Decoupling of job reallocation processes (J63) |
| Government incentives for production (O31) | Exacerbation of technological sclerosis (O39) |
| Creation incentives (O31) | Increase in pace of job reallocation (J63) |
| Combination of government policies (E65) | Restoration of economic efficiency (D61) |