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The Replacement Problem in Frictional Economies: An 'Equivalence Result'

Giovanni Violante and Andreas Hornstein
Authors registered in the RePEc Author Service: Per Krusell

No 5026, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: J41 J64 O33 (search for similar items in EconPapers)
Date: 2005-04
New Economics Papers: this item is included in nep-dev and nep-dge
References: Add references at CitEc
Citations: View citations in EconPapers (9)

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