UNEMPLOYMENT, CONSUMPTION AND GROWTH

Using a standard overlapping generations framework modified to incorporate matching frictions in the labour market and a technology capable of yielding unbounded endogenous growth, we show that the cross-country bivariate correlation between unemployment and growth can be either positive or negative depending on the source of the differences in economic structures across countries. We also present a two-sector variant of the model in which there is imperfect competition in consumption goods production. A reduction in the propensity to save leads to an expansion in the market size for consumption goods, and an increase in employment. If entry costs into consumption goods production are sufficiently large this expansion in employment can be big enough to produce an increase in the total volume of saving - and therefore growth - even though the propensity to save has decreased.