Information and Communication Technology in Matching and Production

In this paper, we integrate two workhorse models in economics: the monopolistic competition model of dixit and stiglitz and the search unemployment model of pissarides. Information and communication technology (ict) is interpreted as a (i) technical progress in the matching function of the pissarides labor market search model, where it is increasing the probability of filling a vacancy, and (ii) technical change in the production function of the dixit-stiglitz goods market model where it is increasing fixed costs and decreasing variable costs. All effects together, modeled as a permanent once-and-for-all ict and internet shock, increase the vacancy/unemployment ratio, decrease the long-run equilibrium unemployment rate, and increase wages.