Technology-policy interaction in frictional labour-markets

Andreas Hornstein, Per Krusell, Giovanni L. Violante

Research output: Contribution to journalArticlepeer-review

38 Scopus citations


Does capital-embodied technological change play an important role in shaping labour-market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labour demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labour-market regulations (unemployment benefits, payroll taxes, and firing costs) exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labour-market experience relative to that of the U.S.: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labour share. A calibrated version of our model suggests that this technology-policy interaction could explain a sizeable fraction of the observed differences between the U.S. and Europe.

Original languageEnglish (US)
Pages (from-to)1089-1124
Number of pages36
JournalReview of Economic Studies
Issue number4
StatePublished - Oct 2007
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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