Schumpeterian Restructuring

We develop a theory of cyclical unemployment, which relates the processes of job creation and job destruction over the business cycle, to the processes of restructuring, innovation and implementation arising from a model of endogenous cyclical growth. Due to a moral hazard problem, production workers are paid efficiency wages and experience involuntary unemployment. The model captures two key components of unemployment fluctuations: a broad, but temporary component due to declines in aggregate demand and a sector—specific, but persistent component due to firm turnover. In addition to the standard pro-cyclical forces acting on the wage, our framework highlights the role of countercyclical forces associated with job restructuring that are concentrated in recessions. In particular, our model implies that wages tend to be more pro-cyclical when productivity growth is low, and less pro-cyclical, or even counter—cyclical, when productivity growth is high.