Labor Market Dynamics and Growth

Axel Gottfies and Jake Bradley
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Axel Gottfies: School of Economics, University of Edinburgh
Jake Bradley: School of Economics, University of Nottingham

No 308, Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: We embody a technological diffusion process into the canonical search and matching model of the labor market. New matches imitate the production process of incumbents. The resulting model retains the features of a labor search model whilst also generating endogenous growth through creative destruction. The model is calibrated to standard moments from the US labor market and generates, consistent with data, an order of magnitude more amplification in unemployment than a similarly calibrated model without endogenous growth. The model provides a natural framework to decompose the sources of growth based on labor market flows. Using cross-country data for 32 countries across a broad range of development, we find that growth via creative destruction is quantitatively more important for developing countries.

Pages: 53 pages
Date: 2022-07
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