Labor Market Dynamics and Growth

This paper seeks to understand the implications of incorporating economic growth into a search-theoretic model of the labor market. To this end, a technological diffusion process is embedded into the canonical search and matching model of the labor market. New matches imitate the production process of incumbents. Although the canonical model is only modified slightly, there are stark differences in economic intuition across the two models. Market tightness is equilibrated through a different margin, and comparative statics of the two models are qualitatively different. Additionally, the model with endogenous growth — consistent with empirical data — generates stronger unemployment cyclicality than a similarly calibrated model without endogenous growth. (JEL: J31, J64, O47)

Keywords: creative destruction, unemployment, growth.