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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Find related papers by JEL classification: E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
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