The Impact of TFP Growth on Steady‐state Unemployment*

Abstract

Theoretical predictions of the impact of total factor productivity (TFP) growth on unemployment are ambiguous, and depend on the extent to which new technology is embodied in new jobs. We evaluate a model with embodied and disembodied technology, capitalization, and creative destruction effects. In econometric estimates with a panel of industrial countries we find a large negative impact of TFP growth on unemployment, which implies that embodied technology and creative destruction play no role in the steady-state dynamics of unemployment. Capitalization effects explain some of the estimated impact but a part remains unexplained. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Productivity growth, on-the-job search, and unemployment

“…Blanchard and Wolfers (2000) estimate that a 1% decline in the growth rate leads to 0.25%-0.7% increase in the unemployment rate. Pissarides and Vallanti (2007) find the effect to be 1.3% to 1.5%. After calibrating our model, we find that a one percentage point decline in productivity growth increases the unemployment rate by 0.32%.…”

“…On the other hand, in the model with embodied technological progress, faster productivity growth increases unemployment through creative destruction Howitt, 1994, 1998;Postel-Vinay, 2002). Motivated by the empirical evidence that productivity growth decreases the unemployment rate, Pissarides and Vallanti (2007) demonstrate that totally disembodied technology is necessary for the model to match empirical evidence. In this paper, we follow Pissarides and Vallanti (2007), and study the effect of DTP on labor market dynamics.…”

“…In order to study the impact of long-run productivity growth on unemployment, we introduce disembodied technological progress (henceforth DTP), as in Pissarides (2000) and Pissarides and Vallanti (2007). Our model differs from the standard search and matching model with DTP with respect to job search and job separation.…”

“…Recently, Pissarides and Vallanti (2007) demonstrate that the matching model with DTP fails to explain the magnitude of the impact of growth on unemployment. Specifically, in the standard matching model with DTP and exogenous job separation, a 1% decrease in the growth rate increases unemployment by about 0.01%, assuming Nash bargaining over wages.…”

“…Related Literature: The search and matching theory predicts that the impact of productivity growth on unemployment depends on the extent to which new technology is embodied in new jobs (Mortensen and Pissarides, 1998;Pissarides and Vallanti, 2007). The standard search and matching model with disembodied technological progress predicts that a faster rate of productivity growth reduces unemployment through the so called capitalization effect (Pissarides, 2000, chapter 3).…”