On the Timing and Efficiency of Creative Destruction / Ricardo J. Caballero, Mohamad L. Hammour.

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Caballero, Ricardo J

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w4768.Publication details: Cambridge, Mass. National Bureau of Economic Research 1994.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper analyzes the timing, pace and efficiency of the on- going job reallocation that results from product and process innovation. There are strong reasons why an efficient economy ought to concentrate both job creation and destruction during cyclical downturns, when the opportunity cost of reallocation is lowest. Malfunctioning labor markets can disrupt this synchronized pattern and decouple creation and destruction. Moreover, irrespective of whether workers are too strong or too weak, labor market inefficiencies generally lead to technological 'sclerosis,' characterized by excessively slow renovation. Government incentives to production may alleviate high unemployment in this economy, but at the cost of exacerbating sclerosis. Creation incentives, on the contrary, increase the pace of reallocation. We show how an optimal combination of both types of policies can restore economic efficiency.

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Working Paper	Biblioteca Digital	Colección NBER	nber w4768 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w4765 What Ends Recessions? /	nber w4766 Mass Layoffs and Unemployment /	nber w4767 Agglomeration Benefits and Location Choice: Evidence from Japanese Manufacturing Investment in the United States /	nber w4768 On the Timing and Efficiency of Creative Destruction /	nber w4769 Macroeconomic Adjustment with Segmented Labor Markets /	nber w4770 Estimating a Wage Curve for Britain 1973-1990 /	nber w4771 Relative Wage Movements and the Distribution of Consumption /	Next

June 1994.

This paper analyzes the timing, pace and efficiency of the on- going job reallocation that results from product and process innovation. There are strong reasons why an efficient economy ought to concentrate both job creation and destruction during cyclical downturns, when the opportunity cost of reallocation is lowest. Malfunctioning labor markets can disrupt this synchronized pattern and decouple creation and destruction. Moreover, irrespective of whether workers are too strong or too weak, labor market inefficiencies generally lead to technological 'sclerosis,' characterized by excessively slow renovation. Government incentives to production may alleviate high unemployment in this economy, but at the cost of exacerbating sclerosis. Creation incentives, on the contrary, increase the pace of reallocation. We show how an optimal combination of both types of policies can restore economic efficiency.