Jobless growth: appropriability, factor substitution, and unemployment * A comment

Caballero and Hammour present a fresh view of Eurosclerosis, especially of chronic high unemployment. In the earlier standard view, chronic unemployment results from real wages that are fixed at levels that preclude full employment. In addition, generous unemployment compensation, unlimited in duration, is paid to keep the unemployed happy. Wage rigidity is central to the story-if employers could set wages freely, they could attract many of the unemployed by offering wages below the current artificially high level but above the level of the do!e. In Caballero and Ha,mmour’s new view, wages are not rigid. Quite the opposite-the wage bargain would not be honored even if both parties intended it to be in advance. Wages are adjusted, through a new bargain, each period. The outcome of the bargain is such that separations would be efficient under normal conditions. The resulting equilibrium would be the standard competitive equilibrium with complete wage flexibility if there were no other complicating factors such as job search. Caballero and Hammour-following the leads of Diamond (1982) and Mortensen (i982)-have banished arbitrary assumptions of wage rigidity in fa,vor of a full economic analysis. Another important body of thought-the efficiency wage model of Shapiro and Stiglitz (1984) and others--underlies the unemployment analysis in the paper, though the connection is not stressed by the authors. To point out the relation and explain some aspects of the paper that may escape the