Arnold, Lutz G. (2006) Does the Choice Between Wage Inequality and Unemployment Affect Growth? German Economic Review 7 (1), pp. 87-112.
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We present a non-scale continuous-time overlapping-generations growth model that provides an explanation for why economies with relative wage rigidity feature higher unemployment, but not slower productivity growth, than economies with flexible wages. The compression of the wage distribution associated with relative wage rigidity slows down human capital accumulation and growth ceteris paribus. But unemployment among the low-skilled workers strengthens the incentives to invest in human capital and, hence, growth. The two effects are offsetting, and growth is independent of the prevailing degree of relative wage rigidity. This knife-edge result is robust with respect to some modifications of the model.
|Institutions:||Business, Economics and Information Systems > Institut für Volkswirtschaftslehre und Ökonometrie > Lehrstuhl für Theoretische Volkswirtschaft (Prof. Dr. Lutz Arnold)|
|Keywords:||Education • wage inequality • unemployment • R&D growth models • growth without scale effects|
|Subjects:||300 Social sciences > 330 Economics|
|Refereed:||Yes, this version has been refereed|
|Created at the University of Regensburg:||Yes|
|Deposited On:||26 Jul 2006|
|Last Modified:||24 Jun 2010 05:42|