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Equilibrium Unemployment and Investment Under Product and Labour Market Imperfections

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Author Info

  • Kauppi, Heikki

    ()
    (University of Helsinki)

  • Koskela, Erkki

    ()
    (University of Helsinki)

  • Stenbacka, Rune

    ()
    (Swedish School of Economics)

Abstract

We study 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, characterized 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1058.

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Length: 31 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1058

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

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References

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  1. Alberto Alesina & Silvia Ardagna & Giuseppe Nicoletti & Fabio Schiantarelli, 2005. "Regulation And Investment," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 791-825, 06.
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  7. Abowd, John M & Lemieux, Thomas, 1993. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 983-1014, November.
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  9. Hoon, Hian Teck, 1998. "Capital Expansion, Endogenous Growth and Equilibrium Unemployment," Australian Economic Papers, Wiley Blackwell, vol. 37(3), pages 257-72, September.
  10. 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.
  11. Denny, K. & Nickell, S., 1990. "Unions And Investment In British Industry," Economics Series Working Papers 9992, University of Oxford, Department of Economics.
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  16. repec:rus:hseeco:41186 is not listed on IDEAS
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Cited by:
  1. Joanna Tyrowicz, 2009. "When Eastern Labour Markets Enter Western Europe CEECs. Labour Market Institutions upon Euro Zone Accession," Working Papers 2009-03, Faculty of Economic Sciences, University of Warsaw.
  2. Leitemo, Kai & Söderström, Ulf, 2004. "Robust Monetary Policy in the New-Keynesian Framework," CEPR Discussion Papers 4805, C.E.P.R. Discussion Papers.
  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.
  5. Mikko Puhakka, 2005. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Macroeconomics 0508033, EconWPA.

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