Title: Technology-policy interaction in frictional labor markets
Description: "Does capital-embodied technological change play an important role in shaping labor market  outcomes? To address this question, we develop a model with vintage capital and  search-matching frictions where irreversible investment in new vintages of capital creates  heterogeneity in productivity among firms, matched as well as vacant. We demonstrate  that capital-embodied technological change reduces labor demand and raises equilibrium  unemployment and unemployment durations. In addition, the presence of labor market  regulation-we analyze unemployment benefits, payroll and income taxes, and firing  costs-exacerbates these effects. Thus, the model is qualitatively consistent with some key  features of the European labor market experience, relative to that of the United States:  it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the  labor share. A calibrated version of our model suggests that this technology-policy interaction  could explain a sizeable fraction of the observed differences between the United  States and Europe."--Federal Reserve Bank of Richmond web site.