Relative convergence in a dual economy with tradeable and non-tradeable goods

This paper develops a two-country two-sector endogenous growth model with a dual labour market based on efficiency wages. Growth is driven by Research done in the (high-tech) tradeable sector. The follower country tends to grow faster the greater the productivity gap from the leader country, but differences in unemployment benefit systems can lead to relative convergence, i.e. a steady state with the backward country lagging behind the leader country. The reason for this is that high social welfare benefits generate high unemployment and reduce the amount of labour employed for R&D purposes. Furthermore, it is shown that a shift in preferences towards non-tradeables can explain a global slowdown in economic growth.