capital intensity the creative destruction effect dominates the capitalization effect.
Therefore, at a high equilibrium level of capital intensity increasing productivity
growth induces a reduction in steady-state labor market tightness and an increase
in the steady-state level of unemployment.
As the creative destruction effect dominates, it follows that through the introduc-
tion of new technologies jobs are destroyed. However, new jobs are also created in
economies with high capital intensities and this leads to new vacancies in the labor
market. The new vacancies are endowed with the latest technology and, due to a
constant labor force, and, because of omitting on-the-job-search, they can be occu-
pied by jobless workers only. Furthermore, since the unemployed are not trained
and do not accumulate further human capital during their jobless time, they do not
have the abilities and the know-how necessary for filling these vacant jobs. Because
the unemployed cannot handle the latest technologies, they are not attractive for
firms and less matching takes place. This implies a reduction in the steady-state
level of matching and, since the reduction in matching is caused by lacking human
capital, this effect is called the qualification-mismatch effect.
Bringing both effects - the creative destruction and the qualification-mismatch ef-
fect - in an economy with high capital intensity together, an increase in the rate of
technical progress leads to lower steady-state labor market tightness (from θ0 to θ1,
see Figure 5a) and for given vacancies an increase in steady-state unemployment is
implied. However, it is not clear how the steady-state capital intensity is influenced
by increasing technical progress - it can shrink or rise; both effects are possible.
Furthermore, as steady-state unemployment increases and steady-state labor mar-
ket tightness decreases, i.e. for an average unemployed person it will be more dif-
ficult to become matched with a vacancy, since more jobless workers apply for the
same vacancy, an average unemployed remains longer in the unemployment pool
and steady-state duration of unemployment increases. Therefore, the reduction in
steady-state labor market tightness induces that the matching probability for the
unemployed shrinks and an increase in the steady-state duration of unemployment
follows (from p0 to p1, see Figure 5b).
Considering the implications resulting from an increase in technological progress
on steady-state long-term unemployment, two effects working in the same direc-
tion can be distinguished. First, the share of steady-state long-term unemployment
rises simply because steady-state unemployment duration increases (from φ0 to φ1,
see Figure 5c). Second, steady-state long-term unemployment additionally goes up,
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