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Economic growth with unemployment and wage inequality - the role of market frictions


An endogenous growth model will be constructed in which workers absorb a fraction of the economy's continually growing stock of public knowledge by investing in education. The level of schooling undertaken is assumed to be a key determinant of the rate of economic growth. Once schooling is completed, workers are brought together with vacancies/firms via a stochastic matching technology, designed to capture the degree of market frictions. The labour market is populated by overlapping generations of workers of differing productivities. The model can explain the observed negative correlation between wages and the unemployment rate. Furthermore, the characterisation of the wage structure across different generations will allow us to examine issues pertaining to wage inequality. Finally, calibration methods can provide a quantitative assessment of the effects of alternative economic policies, which improve the organization of the labour market, on economic growth, unemployment and the wage distribution.

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