Citation

Discussion Paper Details

Please find the details for DP5026 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: The Replacement Problem in Frictional Economies: An 'Equivalence Result'

Author(s): Andreas Hornstein, Per Krusell and Giovanni L. Violante

Publication Date: April 2005

Keyword(s): creative destruction, inequality, technical change, unemployment and upgrading

Programme Area(s): International Macroeconomics and Labour Economics

Abstract: We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labour market. We distinguish between two polar cases studied in the literature: a ?creative destruction? economy where new machines enter chiefly through new matches, and an ?upgrading? economy where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light of the fact that, in the model calibrated to the US economy, both unemployment and vacancy durations are very short, i.e., the matching frictions are quantitatively minor. Hence, the equilibrium allocations of the model are remarkably close to those of a frictionless version of our economy where firms are indifferent between upgrading and creative destruction, and where every worker is paid the same market-clearing wage. These results are robust to extensions of the benchmark model that incorporate machine-specific and match-specific heterogeneity.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5026

Bibliographic Reference

Hornstein, A, Krusell, P and Violante, G. 2005. 'The Replacement Problem in Frictional Economies: An 'Equivalence Result''. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5026