The Impact of Productivity Growth on Labor Market Dynamics

This paper studies the impact of productivity growth on the rates of worker ‡ows, and thus the unemployment rate. I …nd that in the U.S. labor market, faster productivity growth reduces the separation rate and the unemployment rate in the long-run. I incorporate disembodied technological progress, on-the-job search and sunk costs of creating job positions into a model of endogenous job separation by Mortensen and Pissarides (1994). The incorporation of on-the-job search and sunk costs for job creation gives rise to new channels through which faster growth may reduce unemployment by reducing the separation rate and inducing more job creation. I demonstrate that introducing these two factors substantially improves the performance of the Mortensen and Pissarides model in accounting for the impact of growth on unemployment. Quantitative analysis of the model shows that these new channels magnify the reduction in unemployment due to growth compared to the standard matching model with productivity growth. The paper also provides empirical evidence on the long-run relationship among productivity growth, unemployment rates and rates of job …nding and separation in the U.S. labor market. Keywords: Growth; Unemployment; Search-matching model; On-the-job search; Vacancy creation JEL Classi…cation: E24; J64; O40 I am profoundly grateful to Rasmus Lentz for his constant support and guidance. I am also particularly grateful to Steven Durlauf and John Kennan for their invaluable comments and suggestions. I am indebted to Yuya Takahashi for his help during the various stages of this paper. I also thank John Morrow, Michael Rapp, Jiao Shi, Yoshimasa Shirai and Shintaro Yamaguchi for their helpful comments. All remaining errors are mine. Mailing Address: University of Wisconsin-Madison, Department of Economics, 1180 Observatory Dr, Madison, WI 53706-1393, USA. E-mail: [email protected].