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Involuntary Unemployment in a Neoclassical Growth Model with Public Debt and Human Capital

Author

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  • Farmer Karl

    (University of Graz, Austria)

  • Kuplen Stefan

    (University of Graz, Austria)

Abstract

Even more than eight decades since the publication of Keynes’ “General Theory of Employment, Interest, and Money” modern macroeconomists disagree on the notion of “underemployment equilibrium” with so-called “involuntary unemployment”. While the majority of macro theorists trace involuntary unemployment back to frictions and rigidities in the adaptation of wages and output prices to market imbalances, a minority position holds that even under perfectly flexible output prices and wage rates involuntary unemployment might occur. Morishima in “Walras’ Economics” and more recently Magnani presume that contrary to the majority view aggregate investment is not perfectly flexible but governed by “animal spirits” of investors. The aim of the present paper is to integrate the Morishima-Magnani approach into a Diamond-type overlapping generations’ (OLG) model with internal public debt subsequently extended by human capital accumulation. It turns out that in spite of perfectly flexible real wage and interest rate involuntary unemployment occurs in intertemporal general equilibrium when aggregate investor sentiments are too pessimistic regarding the rentability of investment in real capital. In the model extended by human capital a higher public debt to output ratio decreases unambiguously involuntary unemployment, if initially the endogenous output growth rate is higher than the real interest rate.

Suggested Citation

  • Farmer Karl & Kuplen Stefan, 2018. "Involuntary Unemployment in a Neoclassical Growth Model with Public Debt and Human Capital," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 63(2), pages 3-34, August.
    • Handle: RePEc:vrs:subboe:v:63:y:2018:i:2:p:3-34:n:1
    DOI: 10.2478/subboec-2018-0006
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    References listed on IDEAS

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    2. Adriana Elena Porumboiu & Petre Brezeanu, 2023. "Macroeconomic Factors that Generate Fiscal Risk in Romania," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 8, pages 35-56.

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    More about this item

    Keywords

    Underemployment equilibrium; involuntary unemployment; aggregate investment function; overlapping generations’ model; human capital;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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