Asset bubbles, labour market frictions and R&D‐based growth

Abstract

Employing an overlapping generations model of R&D‐based growth with labour market frictions, this paper examines how employment changes induced by labour market frictions influence asset bubbles and long‐run economic growth. Asset bubbles can (cannot) exist when the employment rate is high (low), which leads to higher (lower) economic growth through labour market efficiency. We also explore the steady state and transitional dynamics of bubbles, economic growth and employment. Furthermore, we show that policy or parameter changes with a negative influence on the labour market can lead to a bubble burst.

Asset Bubbles, Unemployment, and a Financial Crisis

“…It follows that B t = B d t in equilibrium, and thus, the use of Eqs. ( 9), ( 14), and (18) rewrites Eq. (20) as follows:…”

Asset bubble and endogenous labor supply: A clarification

“…Definition 1 Given the initial capital stock k 0 = K 0 /N 0 > 0, an intertemporal equilibrium is a sequence (k t , l t , R t , b t ) ∈ R 4 ++ satisfying (10), (13), (14) and (15) 3 Stationary equilibria A steady state is a solution k t = k, l t = l, R t = R and b t = b for all t ≥ 0 satisfying:…”

“…We now examine whether the existence of asset bubble raises employment and capital comparing the bubbly and and bubbleless steady states. 4 By assessing the elasticity of labor supply and capital with respect to the interest rate, we will be able to deduce whether the bubbly steady state is characterized by higher levels of capital and labor supply. When the bubble exists, the interest rate increases fromR to R * .…”

“…Many countries have witnessed this phenomenon, for instance, the United States during 2000-2007 and Japan during 1980-1990. Asset bubble periods are associated to high levels of employment and capital stock, and boom in economic activity (Martin and Ventura (2012), Miao and Wang (2016), Hashimoto and Im (2019)). After the collapse of housing and asset prices in the U.S in 2007, the average annual labor hours recorded a decline of 1.83% in 2009 (OECD database).…”

Productivity Growth, Industry Location Patterns and Labor Market Frictions

“…Given the operating profit of final good firms and labor market tightness, wages are continuously renegotiated between the firm and its employee through Nash bargaining (Pissarides 2000). More specifically, wages are set to maximize the Nash product (E − U) β (J − V ) 1−β , where β ∈ (0, 1) is the employee's bargaining power, and J(w) and E(w) are determined through the no-arbitrage conditions (18) and (20). The first order condition yields…”