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Equilibrium unemployment and investment under product and labour market imperfections

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Author Info

  • Kauppi , Heikki

    ()
    (Department of Economics, University of Helsinki)

  • Koskela , Erkki

    ()
    (Department of Economics, University of Helsinki)

  • Stenbacka , Rune

    ()
    (Swedish School of Economics)

Abstract

The study looks at the implications of product market competition and investment for price setting, wage bargaining and thereby for equilibrium unemployment in an economy with product and labour market imperfections. We show that intensified product market competition will reduce equilibrium unemployment, whereas the effect of increased capital intensity is more complex. Higher capital intensity will decrease the equilibrium unemployment when the elasticity of substitution between capital and labour is less than one, while the reverse happens when this elasticity is higher than one, but smaller than the elasticity of substitution between products. Finally, we demonstrate how labour and product market imperfections, characterised by the wage and price setting mark-ups, affect the optimal capital stock. Our findings raise important questions for future empirical research.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 11/2004.

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Length: 40 pages
Date of creation: 14 Jan 2004
Date of revision:
Handle: RePEc:hhs:bofrdp:2004_011

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: equilibrium unemployment; product market imperfections; investment; wage bargaining;

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References

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  1. Damien J. NEVEN & Lars-Hendrik R�LLER & Zhentang ZHANG, 1998. "Union Power and Product Market Competition : Evidence from the Airline Industry," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9810, Université de Lausanne, Faculté des HEC, DEEP.
  2. Nickell, S & Vainiomaki, J & Wadhwani, S, 1994. "Wages and Product Market Power," Economica, London School of Economics and Political Science, vol. 61(244), pages 457-73, November.
  3. Bentolila Samuel & Saint-Paul Gilles, 2003. "Explaining Movements in the Labor Share," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-33, October.
  4. Alberto Alesina & Silvia Ardagna & Giuseppe Nicoletti & Fabio Schiantarelli, 2003. "Regulation and Investment," NBER Working Papers 9560, National Bureau of Economic Research, Inc.
  5. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
  6. Denny, K. & Nickell, S., 1990. "Unions And Investment In British Industry," Economics Series Working Papers 9992, University of Oxford, Department of Economics.
  7. Ebell, Monique & Haefke, Christian, 2003. "Product Market Deregulation and Labor Market Outcomes," IZA Discussion Papers 957, Institute for the Study of Labor (IZA).
  8. John M. Abowd & Thomas Lemieux, 1991. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," NBER Working Papers 3808, National Bureau of Economic Research, Inc.
  9. Olivier Blanchard & Francesco Giavazzi, . "Macroeconomic effects of regulation and deregulation in goods and labor markets," Working Papers 187, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  10. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  11. Hoon, Hian Teck, 1998. "Capital Expansion, Endogenous Growth and Equilibrium Unemployment," Australian Economic Papers, Wiley Blackwell, vol. 37(3), pages 257-72, September.
  12. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  13. Herbertsson, Tryggvi Thor & Zoega, Gylfi, 2002. "The Modigliani 'puzzle'," Economics Letters, Elsevier, vol. 76(3), pages 437-442, August.
  14. Stephen Nickell & D Nicolitsas, 1994. "Wages," CEP Discussion Papers dp0219, Centre for Economic Performance, LSE.
  15. repec:rus:hseeco:41186 is not listed on IDEAS
  16. Gersbach, Hans, 2000. "Promoting Product Market Competition to Reduce Unemployment in Europe: An Alternative Approach?," Kyklos, Wiley Blackwell, vol. 53(2), pages 117-33.
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Citations

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Cited by:
  1. Leitemo, Kai & Söderström , Ulf, 2004. "Robust monetary policy in the New-Keynesian framework," Research Discussion Papers 31/2004, Bank of Finland.
  2. Joanna Tyrowicz, 2009. "When Eastern Labour Markets Enter Western Europe. CEECs Labour Market Institutions upon Euro Zone Accession," National Bank of Poland Working Papers 61, National Bank of Poland, Economic Institute.
  3. Antti Suvanto & Juhana Hukkinen, 2005. "Stable price level and changing prices," Macroeconomics 0508034, EconWPA.
  4. Mikko Puhakka, 2005. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Macroeconomics 0508033, EconWPA.
  5. Mälkönen , Ville, 2004. "The efficiency implications of financial conglomeration," Research Discussion Papers 17/2004, Bank of Finland.

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