Can technical change exacerbate the effects of labor market sclerosis?

This paper constructs a general equilibrium model with technology adoption, in which labor reallocation is determined by the rate of embodied technical change (ETC) and by labor market rigidities. In the calibrated model, ETC has a positive effect on aggregate employment, but this effect is weaker in the presence of firing costs. As a result, a higher rate of ETC generates a modest increase in the divergence of employment outcomes across countries that have different levels of institutional firing costs. Central to this result is the link between adoption costs and the rate of embodied technical change. The importance of entry costs and skill requirements is also explored. (c) 2007 Elsevier B.V. All rights reserved.