Exogenous Growth and Unemployment

Abstract

Is growth “good” for employment, i.e. do higher growth levels lead to lower unemployment levels as ofte n stated in public? Intuitively, it is not clear whether growth and unemployment are positively or negatively related as there are two main effects that need to be considered. On the one hand, one of the main channels for positive growth rat es is an increase in productivity. However, if this technological progress is labour-saving, i.e less labour is required to reach the same output levels as before, then, unless this increased output is absorbed by a corresponding rise in demand, unemployment and growth will be positively linked. This also makes clear that technological progress can not only affect the aggregate (un) employment level, but for the case that the optimal factor int ensities change as a result, also the functional distribution between, for example, labour and capital income.