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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

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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. Alesina, Alberto F & Ardagna, Silvia & Nicoletti, Giorgio & Schiantarelli, Fabio, 2003. "Regulation and Investment," CEPR Discussion Papers 3851, C.E.P.R. Discussion Papers.
  3. Samuel Bentolila & Gilles Saint Paul, 1999. "Explaining movements in the labor share," Economics Working Papers 374, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Monique Ebell & Christian Haefke, 2002. "Product market deregulation and labor market outcomes," Economics Working Papers 726, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2003.
  5. 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.
  6. Olivier Blanchard & Francesco Giavazzi, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," NBER Working Papers 8120, National Bureau of Economic Research, Inc.
  7. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, September.
  8. 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.
  9. Herbertsson, Tryggvi Thor & Zoega, Gylfi, 2002. "The Modigliani 'puzzle'," Economics Letters, Elsevier, vol. 76(3), pages 437-442, August.
  10. Hoon, Hian Teck, 1998. "Capital Expansion, Endogenous Growth and Equilibrium Unemployment," Australian Economic Papers, Wiley Blackwell, vol. 37(3), pages 257-72, September.
  11. Denny, K. & Nickell, S., 1990. "Unions And Investment In British Industry," Economics Series Working Papers 9992, University of Oxford, Department of Economics.
  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. 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.
  14. repec:rus:hseeco:41186 is not listed on IDEAS
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Citations

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Cited by:
  1. Mikko Puhakka, 2005. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Macroeconomics 0508033, EconWPA.
  2. Kai Leitemo & Ulf Soderstrom, 2004. "Robust Monetary Policy in the New-Keynesian Framework," Working Papers 273, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Mälkönen , Ville, 2004. "The efficiency implications of financial conglomeration," Research Discussion Papers 17/2004, Bank of Finland.
  4. Antti Suvanto & Juhana Hukkinen, 2005. "Stable price level and changing prices," Macroeconomics 0508034, EconWPA.

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