Equilibrium search with heterogeneous firms, workers and endogenous human capital

This article shows how the endogenous human capital affects the labor market equilibrium when jobs provided by firms can be either unskilled or skilled and workers differ in their education level which can be either low-educated or high-educated. We develop an equilibrium search model in which the high-educated workers are assumed to be able to accept either the unskilled jobs or the skilled jobs, while the low-educated workers can only accept the unskilled jobs. The market equilibrium is characterized by deriving the unemployment rate and the human capital distributions when the growth rate of the human capital is an endogenous variable. The results demonstrate that the structure proportion of the offered jobs affects the equilibrium which shows there is a threshold that can distinguish whether the equilibrium is separating or cross-skill. In addition, the cross-skill equilibrium solution implies the high-educated workers are more likely to own higher pay rates than the low-educated workers with same tenure. It also yields a new insight on the effect of the structure proportion of workers on the profits, which implies the profits of the firms decrease with the increasing number of the low-educated workers. Moreover, the profit of the firms offering the skilled jobs is greater than those offering the unskilled jobs until there is only very few high-educated workers

Equilibrium search with heterogeneous firms, workers and endogenous human capital

This article shows how the endogenous human capital affects the labor market equilibrium when jobs provided by firms can be either unskilled or skilled and workers differ in their education level which can be either low-educated or high-educated. We develop an equilibrium search model in which the high-educated workers are assumed to be able to accept either the unskilled jobs or the skilled jobs, while the low-educated workers can only accept the unskilled jobs. The market equilibrium is characterized by deriving the unemployment rate and the human capital distributions when the growth rate of the human capital is an endogenous variable. The results demonstrate that the structure proportion of the offered jobs affects the equilibrium which shows there is a threshold that can distinguish whether the equilibrium is separating or cross-skill. In addition, the cross-skill equilibrium solution implies the high-educated workers are more likely to own higher pay rates than the low-educated workers with same tenure. It also yields a new insight on the effect of the structure proportion of workers on the profits, which implies the profits of the firms decrease with the increasing number of the low-educated workers. Moreover, the profit of the firms offering the skilled jobs is greater than those offering the unskilled jobs until there is only very few high-educated workers

Knowledge Exchange, Matching, and Agglomeration

Despite wide recognition of their significant role in explaining sustained growth and economic development, uncompensated knowledge spillovers have not yet been fully modeled with a microeconomic foundation. This paper illustrates the exchange of knowledge as well as its consequences for agglomerative activity in a general-equilibrium search-theoretic framework. Agents, possessing differentiated types of knowledge, search for partners to exchange ideas in order to improve production efficacy. When individuals’ types of knowledge are too diverse, a match is less likely to generate significant innovations. We demonstrate that the extent of agglomeration has significant implications for the patterns of information flows in economies. By simultaneously determining the patterns of knowledge exchange and the population agglomeration of an economy, we identify additional channels for interaction between agglomerative activity and knowledge exchange. The main implications of the model are a negative correlation between city population and diversity of knowledge exchange and a positive correlation between city population and per capita knowledge or patent output. Contrary to previous work in urban economics and growth theory, it is possible that a decentralized equilibrium is under-populated or over-populated and under-selective or over-selective in knowledge exchange, compared to the social optimum. By allowing for perpetual knowledge accumulation, we find that population agglomeration is generally accompanied by higher growth. The main findings remain qualitatively unchanged even if we allow individual knowledge types to change over time, though the creation of new types of knowledge may result in multiple equilibria.Matching, Knowledge Exchange and Spillovers, Agglomerative Activity

The Cash-In-Advance Constraint in Monetary Growth Models

In most monetary models of economic growth, higher long-run inflation is associated with a decline in the growth rate and employment. We show that this result is sensitive with respect to the specification of the cash-in-advance constraint. We consider three types of endogenous growth models: 1) the AK-model, 2) the Lucas (1990) supply-side model, and 3) the two-sector model of Jones and Manuelli (1995). With the standard cash-in-advance constraint on consumption, higher inflation results in lower growth and employment in all three models, while, in the cash-credit good economy of Dotsey and Ireland (1996), the effect is the exact opposite.inflation, growth, costly credit, search unemployment

Knowledge exchange, matching, and agglomeration

Despite wide recognition of their significant role in explaining sustained growth and economic development, uncompensated knowledge spillovers have not yet been fully modeled with a microeconomic foundation. The main purpose of this paper is to illustrate the exchange of knowledge as well as its consequences on agglomerative activity in a general-equilibrium search-theoretic framework. Agents, possessing differentiated types of knowledge, search for partners to exchange ideas and create new knowledge in order to improve production efficacy. When individuals’ types of knowledge are too diverse, a match is less likely to generate significant innovations. We demonstrate the extent of agglomeration has significant implications for the patterns of information flows in economies. Further, by simultaneously determining the patterns of knowledge exchange and the spatial agglomeration of an economy we identify additional channels for interaction between agglomerative activity and knowledge exchange. Finally, contrary to previous work in spatial agglomeration, our model suggests that agglomerative environments may be either under-specialized and under-populated or over-specialized and over-populated relative to the social optimum.Econometric models

Knowledge Exchange, Matching, and Agglomeration

Despite wide recognition of their significant role in explaining sustained grwoth and economic development, uncompensated knowledge spillovers have not yet been fully modeled with a microeconomic foundation. The main purpose of this paper is to illustrate the creation of knowledge as well as its consequences for agglomerative activity in a general-equilibrium search-theoretic framework. Agents, possessing differentiated types of knowledge, search for partners to exchange ideas and create new knowledge in order to improve production efficacy. When individuals' types of knowledge are too diverse, a match is less likely to generate significant innovations. We demonstrate that the extent of agglomeration has significant implications for the patterns of information flows in economies. Further, by simultaneously determining the patterns of knowledge exchange and the spatial agglomeration of an economy we identify additional channels for interaction between agglomerative activity and knowledge exchange. Finally, contrary to previous work on spatial agglomeration, our model suggests that agglomerative environments may be either under-specialized and under-populated or over-specialized and over-populated relative to the social optimum.

Irreversibility, uncertainty and underemployment equilibria

In a competitive overlapping generation model, underutilization of labor and equipment can be due to the combination of irreversibility of human capital, physical capital and technology with idiosyncratic productivity shocks. Irreversibilities and uncertainty generate an inefficient allocation of resources among sectors, which takes the form of underemployment and underutilization of capacities at the aggregate level and affects the equilibrium path of capital. We provide examples in which this missallocation, called structural "mismatch," can be responsible, a.o., for an "inescapable poverty trap," or for periodic orbits generating endogenous fluctuations in underemployment

The Underground Economy in a Matching Model of Endogenous Growth

A matching model will explain both unemployment and economic growth by considering the underground sector. Three problems can thus be simultaneously accounted for: (i) the persistence of underground economy, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. The key assumptions adopted are that entrepreneurial ability is heterogeneous across individuals; skill accumulation determines productivity growth in the regular sector and a positive externality on the underground sector; job-seekers choose whether or not to invest in education and skill depending on the expected wages in the two sectors. The conclusions are that the least able entrepreneurs set up underground firms, employ unskilled labour, and do not contribute to growth. Underground employment alleviates unemployment only if the monitoring rate is sufficiently low. Policies for entrepreneurship and monitoring would help both economic growth and employment.entrepreneurship, underground economy, shadow economy, unemployment, human capital, endogenous growth, search and matching models

Social Security, Demographic Trends, and Economic Growth: Theory and Evidence from the International Experience

The worldwide problem with pay-as-you-go (PAYG) social security systems isn't just financial. This study indicates that these systems may have exerted adverse effects on key demographic factors, private savings, and long-term growth rates. Through a comprehensive endogenous-growth model where human capital is the engine of growth, family choices affect human capital formation, and family formation itself is a choice variable, we show that social security taxes and benefits can create adverse incentive effects on family formation and subsequent household choices, and that these effects cannot be fully neutralized by counteracting intergenerational transfers within families. We implement the model using calibrated simulations as well as panel data from 57 countries over 32 years (1960-92). We find that PAYG tax measures account for a sizeable part of the downward trends in family formation and fertility worldwide, and for a slowdown in the rates of savings and economic growth, especially in OECD countries.