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This paper presents a two-country non-scale Schumpeterian endogenous growth model with interindustry North-South trade and wage rigidity in the North. Its purpose is to analyze the effects of a compression of the wage structure and an increase in unemployment benefits on Northern unskilled unemployment and growth. Both innovation and skill acquisition rates are endogenously determined. We show how the two labor market policies differ with respect to education incentives in a general equilibrium with balanced trade. We further highlight the relevance of North-South trade and incomplete Northern specialization for the labor market effects that we obtain in our model. We demonstrate that the growth effects of a compression of the Northern wage structure depend decisively on the specific formulation of rising R&amp;D difficulty.

Schumpeterian Growth, North-South Trade and Wage Rigidity