Job Destruction Rates Research Articles

Growth and Unemployment

This paper analyses the effects of growth on long-run unemployment using a search model of equilibrium unemployment where growth arises explicitly from the introduction of new technologies that require labour reallocation for their implementation. The analysis uncovers and compares between two competing effects of growth on unemployment. The first is a capitalisation effect, whereby an increase in growth raises the capitalised returns from creating jobs and consequently reduces the equilibrium rate of unemployment. The second is a creative destruction effect whereby an increase in growth reduces the duration of a job match, thereby raising the equilibrium level of unemployment both directly, by raising the job separation rate, and indirectly, by discouraging the creation of job vacancies. This paper asks the question of how the rate of economic growth affects unemployment in the long run. The main consideration that leads us to think that this is an interesting question has to do with the re-allocative aspect of growth. In the long run, faster economic growth must come from a faster increase in knowledge. To the extent that the advancement of knowledge is embodied in industrial innovations it is likely to raise the job-destruction rate, through automation, skill-obsolescence, and the bankruptcy associated with the process of creative destruction. In short, increased growth is likely to produce an increased rate of job-turnover, and the search theories of Lucas and Prescott (1974) and Pissarides (1990) imply that an increased rate of job-turnover will result in a higher natural rate of unemployment. This conclusion is also consistent with the empirical results of Davis and Haltiwanger (1990) which show that periods of high unemployment tend to be periods of high job-turnover at the establishment level. It suggests the possibility of a positive longrun tradeoff between growth and unemployment, at least over some range.' There has been relatively little attention paid to our question in the literature on longrun determinants of unemployment. For example, the recent empirical examination by Layard, Nickell and Jackman (1991) of unemployment rates among OECD countries did not even consider the rate of economic growth as a possible explanatory variable. This is consistent with the seminal theoretical work of Phelps (1968) which implies that the natural rate of unemployment is independent of the rate of productivity growth. The only