Endogenous, Efficient Long‐Run Cyclical Unemployment, Endogenous Long‐Run Growth, and Division of Labor

Abstract

The paper uses a dynamic equilibrium model to explain the concurrence of economic growth and business cycles. Introducing durable goods into a model with ex‐ante identical consumer–producers and economies of specialized learning‐by‐doing, the author shows that when job‐shifting costs, economies of specialized learning‐by‐doing, and trading efficiency are sufficiently large, a dynamic equilibrium with business cycles and unemployment might be Pareto superior to noncyclical growth patterns. Long‐run cyclical unemployment still exists when the credit market is imperfect. Extending the model into overlapping generations framework, the author shows that complete division of labor with business cycles would still occur in equilibrium.