DP2927 Wage Growth, Productivity Growth, and the Evolution of Employment

Author(s): Martin F Hellwig, Andreas Irmen
Publication Date: August 2001
Keyword(s): employment, endogenous technical change, perfect competition, productivity growth, wages
JEL(s): D24, D92, E20, E24, J30, O30, O40
Programme Areas: International Macroeconomics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2927

This Paper studies the impact of wage growth on the evolution of employment in an intertemporal general-equilibrium model with endogenous productivity growth. For real wage growth above laissez-faire levels, we obtain steady-state equilibria in which productivity grows at the same rate as wages, the real interest rate is below the laissez-faire level, and so is the common growth rate of consumption, demand, and output. In these steady-state equilibria employment contracts at a constant rate equal to the difference between the growth rates of productivity and output. This contrasts with the view that equality of wage growth and productivity growth is a condition for constant employment.