Flexibility, Investment, and Growth

This paper proposes a model of diversifiable uncertainty, irreversible investment decisions, and endogenous growth. The detailed microeconomic structure of the model makes it possible to study the general equilibrium effects of obstacles to labor mobility. Labor mobility costs reduce private returns to investment, imply a slower rate of endogenous growth, and unambiguously lower a representative agent's welfare. If external effects are disregarded, restricted labor mobility may be consistent with higher wage levels in full employment equilibrium: this may help explain why labor's political representatives often tend to decrease labor mobility in reality, rather than to enhance it. The lower growth rate of "disembodied" productivity, however, implies slower wage growth in equilibrium, with negative welfare effects even for agents who own only labor.