Structural Change and Search Frictions

Economic growth is driven by structural change. Structural change does not come without a cost, the most evident social cost being high and persistent unemployment. This chapter develops a model of an economy with an endogenously expanding service sector, in which the constant flow of workers in and out of the employment relation leads to structural unemployment. The main finding is that the level of unemployment is different between the initial period and the long-run equilibrium growth path, and that along the transition path, the level of unemployment will overshoot its equilibrium level, which can explain the long-run pattern of unemployment in most industrialized countries.