Introduction to Modern Economic Growth It can easily be verified that these two equations can have solutions L1R and L2R 6= L1R , which would correspond to the possibility of a two-period endogenous cycle (see Exercise 14.19) 14.2.3 Labor Market Implications of Creative Destruction Another important implication of creative destruction is related to the fact that growth destroys existing productive units So far this only led to the destruction of the monopoly rents of incumbent producers, without any loss of employment In more realistic economies, creative destruction may dislocate previously employed workers and these workers may experience some unemployment before finding a new job How creative destruction may lead to unemployment is discussed in Exercise 14.17 A final implication of creative destruction that is worth noting relates to the destruction of firm-specific skills It may be efficient for workers to accumulate human capital that is specific to their employers Creative destruction implies that productive units may have shorter horizons in an economy with rapid economic growth An important consequence of this might be that in rapidly growing economies, workers (and sometimes firms) may be less willing to make a range of specific human capital and other investments 14.3 Step-by-Step Innovations* An important feature of the models in the previous two sections that new entrants could undertake innovation on any machine, without having developed any knowhow on a particular line of business This led to a simple structure, in many ways parallel to the models of expanding varieties studied in the previous chapter However, quality improvements in practice may have a major cumulative aspect For example, it may be that only firms that have already reached a certain level of knowledge in a particular product or machine line can engage in further innovations This is in fact consistent with qualitative accounts of technological change and competition in specific industries Abernathy (1980, p 70), for instance, concludes his study of a number of diverse industries by stating that “Each of the major companies seems to have made more frequent contributions in a particular area,” and argues that this is because previous innovations in a field facilitate future innovations This 629