An Innovation-Based Endogenous Growth Model with Equilibrium Unemployment Carmelo Pierpaolo Parello  y This Draft: October 10, 2007 Abstract This paper studies the impact of labor market reforms on growth and unemployment. To do this, a no-shirking model of innovation-based growth is constructed, where labor market reforms are mainly aimed at improv- ing job nding rate and increasing unemployment benet. On a positive standpoint, we nd that there always exists a positive relationship between growth and unemployment. Instead, from a normative standpoint, we nd that the e/ectiveness of all labor market interventions crucially depend on how individuals discount future income. When consumers are impatient, we nd that improving either labor market performance or unemployment benet turns out to induce a permanent fall in both the BGP innovation rate and the equilibrium unemployment rate. When consumers are patient, results turn ambiguous with cases in which both growth and unemployment rates might increase. Jel classication: O33, O34, J6 Keywords: R&D-based growth, wage rigidities, unemployment.  Department of Public Economy - University of Rome La Sapienza and Department of Eco- nomics - IRES, Catholic University of Louvain. Contact address: Via del Castro Laurenziano, 9 - Room 621. 00161 - Rome. Email: carmelo.parello@uniroma1.it; Phone: +39-06-49766987. y I am particularly grateful to Klaus Walde and Paul Segerstrom for fruitful comments and suggestions. I also thank Raouf Boucekkine, David De-la-Croix and Frederick Doquier for comments on a rst version of the paper. The remaining errors are mine. 1