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CAPITAL DESTRUCTION, JOBLESS RECOVERIES, AND THE DISCIPLINE DEVICE ROLE OF UNEMPLOYMENT

  • Marianna Riggi (a1)
Abstract

I consider an economy growing along the balanced growth path that is hit by an adverse shock to its capital accumulation process. The model integrates efficiency wages due to imperfect monitoring of the quality of labor in a search and matching framework with methods of dynamic general equilibrium analysis. I show that, depending on the firms' abilities to assess workers' performance, the discipline device role of unemployment may account for sharp declines in employment and jobless recoveries driven by exceptional increases in the work effort of employees. The model also explains why rigid real wages may prevail in equilibrium: the large movements in unemployment are indeed associated with real wage rigidity, which is generated endogenously by efficiency wages.

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Corresponding author
Address correspondence to: Marianna Riggi, Bank of Italy, via Nazionale 91, 00184 Rome, Italy; e-mail: marianna.riggi@bancaditalia.it.
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I wish to thank an associate editor and two referees for their very helpful suggestions. I am also grateful to Pierpaolo Benigno, Matteo Bugamelli, Julien Champagne, Marco Cosconati, André Kurmann, Tommaso Monacelli, Stefano Neri, Francesco Nucci, Patrizio Pagano, Federico Ravenna, Alfonso Rosolia, Sergio Santoro, Massimo Sbracia, Paolo Sestito, Henry Siu, Stefano Siviero, and participants of the CEPR-CREI conference on “Understanding Jobless Recoveries” Universitat Pompeu Fabra, of the 8th Dynare Conference in Zurich, and of the “Vienna Macroeconomics Workshop 2014” for their helpful suggestions and discussions. The views expressed herein are those of the author and do not necessarily reflect those of the Bank of Italy.

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Macroeconomic Dynamics
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