Implications of General and Specific Productivity Growth in a Matching Model

In this paper, I explore the implications of incorporating long-run productivity growth into a labor market matching model. I allow productivity growth to be of a general or match-specific nature, and consider an environment in which risk-averse workers are matched with firms and engage in long-term employment contracts, to which the workers cannot commit. The environment gives rise to two new channels through which faster growth may reduce unemployment: intertemporal consumption smoothing and specific productivity growth. A quantitative analysis of the model shows that these two channels are able to generate a negative impact of growth on unemployment comparable to empirical estimates, in contrast to the traditional ”capitalization effect”. The analysis also suggests that while a greater specificity of productivity growth tends to decrease the unemployment rate and lengthen workers’ tenure, it makes these variables more responsive to growth and job destruction rates. These results may potentially explain certain labor market differences among the U.S., Europe and Japan. ∗I am deeply indebted to my advisor Andy Atkeson for his continuous guidance and support. I am grateful to Roger Farmer and Christian Hellwig for their invaluable suggestions and encouragement. I have also benefited from the insightful remarks of Ariel Burstein, Matthias Doepke, Hanno Lustig, Lee Ohanian, Pierre-Olivier Weill, Mark Wright, Johnathan Vogel and seminar participants at UCLA and the University of Tokyo. All remaining errors are mine. E-mail: [email protected] 1