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A Growth Model with Unemployment

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  • Mina Mahmoudi
  • Mark Pingle

Abstract

A standard growth model is modified in a straightforward way to incorporate what Keynes (1936) suggests in the "essence" of his general theory. The theoretical essence is the idea that exogenous changes in investment cause changes in employment and unemployment. We implement this idea by assuming the path for capital growth rate is exogenous in the growth model. The result is a growth model that can explain both long term trends and fluctuations around the trend. The modified growth model was tested using the U.S. economic data from 1947 to 2014. The hypothesized inverse relationship between the capital growth and changes in unemployment was confirmed, and the structurally estimated model fits fluctuations in unemployment reasonably well.

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  • Mina Mahmoudi & Mark Pingle, 2018. "A Growth Model with Unemployment," Papers 1806.04228, arXiv.org.
    • Handle: RePEc:arx:papers:1806.04228
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    1. Casares, Miguel & Moreno, Antonio & Vázquez, Jesús, 2014. "An estimated New-Keynesian model with unemployment as excess supply of labor," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 338-359.
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    3. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
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    5. David Cass, 1965. "Optimum Growth in an Aggregative Model of Capital Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(3), pages 233-240.
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