Endogenous Growth, Efficiency Wages, and Persistent Unemployment

This paper establishes a theoretical relation between the level of unemployment and the economic rate of growth. In a model with a monopolistically competitive manufacturing sector and a competitive innovation sector, which both pay efficiency wages, the equilibrium unemployment rate - the Nawru - exhibits an unambiguously negative impact on the long-run growth performance, as it reduces the innovative capacity of the economy. Only if efficiency levels are different across sectors, a causal relation from the growth rate to the level of unemployment can be established, since less innovation shifts the burden to induce efficiency towards the manufacturing sector, thus fostering unemployment.