The impact of TFP growth on the unemployment rate: Does on-the-job training matter?

This paper seeks to gain insights into the relationship between growth and unemployment in a setting with heterogeneous skills, human capital accumulation, on-the-job training and capital-skill complementarity. We use an endogenous job destruction framework in the style of Mortensen and Pissarides (1998) with directed search. We show that when growth accelerates, a larger share of unskilled workers seeks training, increasing firms’ incentives to update job-specific technology (rather than destroying it). By magnifying the impact of growth on employment, the introduction of human capital issues allows the model to more closely match the estimated sensitivity of unemployment with respect to growth. When calibrated, the model manages to reproduce the aggregate capitalization effect estimated using OECD data. We find that growth reduces unemployment for individuals receiving training, while it increases the unemployment rate of unskilled workers without training (creative destruction effect).