Lecture II: Medium run evolutions

Blanchard, “the medium run”

• Develops an adjustment cost model of labor demand and labor supply

• Looks at the dynamic response of a number of variables to labor supply and labor demand shifts

The model

The firm’s optimization problem

Functional forms

Figure 4:

Figure 5

Figure 6

Figure 10

Figure 11

Figure 12

Caballero-Hammour, “Jobless growth”

• Looks at the dynamic response of K/L to wage pushes and more generally “appropriability”

• Uses a putty-clay model instead of Blanchard’s adjustment cost model

The model

The model (continued)

The model (continued)

The model (end)

What is going on?

K

L

Old vintage(Labour intensive)

New vintage(Capital intensive)

w

r

New

Old

ROR A

B

C

D

Initial wage push

Figure 4.2

Figure 4.3