The Economics of 'New Blood'

Abstract

A dynamic general equilibrium model of search and matching is constructed in which: (i) the stock of public knowledge grows through time and (ii) workers accumulate a fraction of this knowledge through education while young. Once their schooling is complete workers enter a primary labor market, whereupon they meet firms at random points in time according to a stochastic matching technology. As a consequence of the time consuming nature of search and the individual embodiment of human capital, the unemployment pool is populated by generations (`vintages') of workers of differing productivities. There is a form of intergenerational rivalry in which the human capital of older generations is rendered obsolete relative to that of more recent ones: the `new blood' effect. An increase in the growth rate of public knowledge, by exacerbating the extent of intergenerational competition, can discourage education, retard economic growth, and raise unemployment levels. It may also result in a more unequal earnings distribution across workers. We argue that these findings offer insights into the post war wage compression and expansion experienced in the U.S. Once on-the-job learning is admitted, the model can also generate the `hump-shaped' real wage-tenure profile across cohorts observed in reality.