Endogenous growth, skill obsolescence and output hysteresis in a New Keynesian model with unemployment

Arbeitspapier

We embed human capital-based endogenous growth into a New-Keynesian model with search and matching frictions in the labor market and skill obsolescence from long-term unemployment. The model can account for key features of the Great Recession: a decline in productivity growth, the relative stability of inflation despite a pronounced fall in output (the "missing disinflation puzzle"), and a permanent gap between output and the pre-crisis trend output. In the model, lower aggregate demand raises unemployment and the training costs associated with skill obsolescence. Lower employment hinders learning-by-doing, which slows down human capital accumulation, feeding back into even fewer vacancies than justified by the demand shock alone. These feedback channels mitigate the disinflationary effect of the demand shock while amplifying its contractionary effect on output. The temporary growth slowdown translates into output hysteresis (permanently lower output and labor productivity).

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Kiel Working Paper ; No. 2162

Classification and Topics

• Classification: Wirtschaft ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity ; Price Level; Inflation; Deflation ; Business Fluctuations; Cycles
• Subject: endogenous growth ; search and matching ; unemployment ; nominal rigidity ; monetary policy ; output hysteresis

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lechthaler, Wolfgang ; Tesfaselassie, Mewael F.
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/224060
• Last update: 10.03.2025, 11:42 AM CET