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The Capital Stock and Equilibrium Unemployment: A New Theoretical Perspective

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  • Sujit Kapadia
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    Abstract

    By assuming Cobb-Douglas production technology, many well-known imperfectly competitive macroeconomic models of the labour market (e.g. Layard, Nickell and Jackman, 1991) imply that equilibrium unemployment is independent of the capital stock. This paper introduces a new notion of capacity into the standard framework. Specifically, we adapt the Cobb-Douglas production function so that when the capital-labour ratio drops below a certain threshold, the returns to labour fall while the returns to capital increase. Using this assumption, we show that equilibrium unemployment depends on the capital stock over a certain range. We also briefly discuss the generalisation for an endogenous capital stock.

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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper181.pdf
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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 181.

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    Date of creation: 01 Dec 2003
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    Handle: RePEc:oxf:wpaper:181

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    Related research

    Keywords: Unemployment; Capital Stock; Investment; Capacity; Technology.;

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    1. Horst Siebert, 1997. "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 37-54, Summer.
    2. Camille Logeay & Silke Tober, 2003. "Time-varying Nairu and Real Interest Rates in the Euro Area," Discussion Papers of DIW Berlin 351, DIW Berlin, German Institute for Economic Research.
    3. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
    4. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
    5. Andrew Oswald, 1984. "Efficient Contracts are on the Labour Demand Curve: Theory and Facts," Working Papers 555, Princeton University, Department of Economics, Industrial Relations Section..
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    7. Arestis, Philip & Mariscal, Iris Biefang-Frisancho, 2000. "Capital Stock, Unemployment and Wages in the UK and Germany," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(5), pages 487-503, November.
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    9. Carlin, Wendy & Soskice, David, 1990. "Macroeconomics and the Wage Bargain: A Modern Approach to Employment, Inflation, and the Exchange Rate," OUP Catalogue, Oxford University Press, number 9780198772446.
    10. Blanchard, Olivier & Jimeno, Juan F, 1995. "Structural Unemployment: Spain versus Portugal," American Economic Review, American Economic Association, vol. 85(2), pages 212-18, May.
    11. Camille Logeay & Silke Tober, 2003. "Time-Varying Nairu and Real Interest Rates in the Euro Area," Economics Working Papers 024, European Network of Economic Policy Research Institutes.
    12. Andrew Glyn, 2003. "Labor Market Institutions and Unemployment: A Critical Assessment of the Cross-Country Evidence," Economics Series Working Papers 168, University of Oxford, Department of Economics.
    13. McKibbin, Warwick J & Vines, David, 2000. "Modelling Reality: The Need for Both Inter-temporal Optimization and Stickiness in Models for Policy-Making," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 106-37, Winter.
    14. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
    15. Constantinos Alexiou & Christos Pitelis, 2003. "On capital shortages and European unemployment: a panel data investigation," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 25(4), pages 613-640, July.
    16. Natasha Miaouli, 2001. "Employment and Capital Accumulation in Unionised Labour Markets: Evidence from five south-European countries," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(1), pages 5-29.
    17. Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-95, September.
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