A Theory on the Impact of Technological Change on Entrepeneurship and Unemployment

This paper proposes a model to examine the impact of exogenous technological growth on entrepreneurship and unemployment. Agents with heterogeneous abilities become entrepre-neurs that create and manage jobs, or workers occupying those jobs. We consider disembodied and embodied technological change; allow growth to inuence the e¤ective discount rate and entrepreneurial ability; and study the labor market with and without frictions. Technological growth has an impact on entrepreneurship via three mechanisms: the capitalization, \u85 rm size, and employment duration e¤ects, relating to how technological growth a¤ects the e¤ective discount rate, entrepreneurial ability, and the optimal duration of a job, respectively. Tech-nological growth has an impact on unemployment via three mechanisms: the composition, job creation, and creative destruction e¤ects, relating to how technological growth a¤ects the occupational choice decision, labor market tightness, and the destruction of jobs, respectively. We nd that, in the absence of labor market frictions, technological growth has an e¤ect on entrepreneurship if and only if it a¤ects an entrepreneurs capacity to manage workers. When labor market frictions are present, technological growth may have a positive or negative impact on entrepreneurship and unemployment depending on the magnitude of each e¤ect. The de-sirable outcome of an increase in the rate of technological growth enhancing entrepreneurship and dampening unemployment is more likely to be obtained when the interest rate does not increase signi\u85cantly with growth, technological change is disembodied, and growth enhances entrepreneurial ability at managing workers