Now let us use the results of Proposition 15.12 to revisit the discussion of the unemployment experiences of continental European economies provided in Blanchard (1997). Consider the model of Section 15.6. Discuss how a wage push, in the form of a wage floor above the market clearing level, first causes unemployment and then, if σ
Proposition 15.12
Consider the baseline model of directed technological change with the two factors corresponding to labor and capital. Suppose that the innovation possibilities frontier is given by the knowledge spillovers specification with extreme state dependence, that is, δ = 1, and that capital accumulates according to (15.45). Then there exists a unique BGP allocation in which there is only labor-augmenting technological change, the interest rate is constant and consumption and output grow at constant rates.