Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Abstract: This paper establishes theoretical relations between the level of unemployment and the economic growth rate. In a model with a monopolistically competitive manufacturing sector and a competitive innovation sector, which both pay efficiency wages, we find that the unemployment rate 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, we can also establish a causal relation from the growth rate to the rate of unemployment, since less innovation shifts the burden to induce efficiency towards the manufacturing sector, thus fostering unemployment.

Keywords: Endogenous Growth; Product Innovation; Equilibrium Unemployment; Efficiency Wages.

JEL-codes: O40 September 1999

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