Capital investment and unemployment in Europe: Neutrality or not?
Productivity variables are often said to have no effect on the NAIRU under wage bargaining as the labour share is unaffected when production is characterised by a unit elasticity of substitution. While production functions such as the CES can explain a negative relationship between investment and equilibrium unemployment, the implication then is that the labour share should increase with investment. In this paper we show that for a long sample in the UK, the labour share has decreased with capital investment. For a panel of European countries for which estimation is possible, the same result is obtained.
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