A Policy Conundrum: Schumpeterian Growth or Job Creation?

This paper formally and quantitatively analyzes the impact of economic policies on long-run growth and equilibrium unemployment. We construct a dynamic general equilibrium model featuring innovation contests through creative destruction, fully-endogenous Schumpeterian growth, rent-protection activities by incumbent firms, and search-based unemployment. We find that industrial policies in the form of production subsidies/taxes to small young firms or large adult firms and R & D subsidies/taxes to entrepreneurs suffer from the policy conundrum: they lead to either faster growth with fewer jobs or slower growth with more jobs. In contrast, labor market policies reducing job vacancy costs avoid the policy conundrum by generating higher growth and lower unemployment.