Optimal Growth with Labor Market Frictions

Abstract

In this paper, I build a capital accumulation model in which labour has to be alternatively employed in the production of goods or in the recruitment of workers. Within this setting, I show that (i) the intensive measure of capital may converge towards its stationary value in a non-monotonic manner; (ii) Pareto optimal allocations can also be achieved in a decentralized environment in which the wage is indexed to labour market tightness; (iii) the consistency of the wage that implements efficient allocations with the competitiveness of the market for goods relies on vanishing values of the discount rate