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Creative Destruction , Capital Accumulation , and Employment Cycles

A Schumpeterian growth model is constructed for an economy where wages are determined by union-firm bargaining. It is shown that the economy is subject to cycles in which capital, output and employment vary in fixed proportion. These increase through saving and capital accumulation until a new technology is introduced, at which moment they fall sharply due to obsolescence of capital. The labour-capital ratio decreases (increases) but the average growth rate of the economy increases (decreases) with regulation (deregulation) in the labour market. The regimes of regulation and deregulation are determined by a simple elasticity rule. Journal of Economic Literature: O41, E31