Growth, Wealth and the Natural Rate: Is the Jobs Crisis a Growth Crisis?

• Main Authors: HOON, Hian Teck, Phelps, Edmund S.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 1995
• Subjects: Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/63
• Institution: Singapore Management University

The effect of faster technical progress is studied in our labour-turnover model of the natual rate of unemployment. In its closed economy version, the model implies that, in the limit, as the steady-growth rate is approached, the increase in the rate of progress is neutral for the natural unemployment rate. Its effects are completely offset by the equal increase in the rate of interest it induces. However, of two small open economies having the same technology level at some date, the one where technical progress has always been and always will be faster will have the lower wealth relative to its wage and a lower wage rate relative to future wage rates. Both effects operate to reduce the natural rate of unemployment. Whether this theory-based hypothesis will be confirmed empirically is a question needing extensive study. But a quick comparison of the G7 countries confirms that the proportionate increase of the unemployment rate in recent decades tended to be greater the more pronounced the productivity slowdown.