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Equilibrium Unemployment with Capital Investments under Labour Market Imperfections

Author

Listed:
  • Erkki Koskela

    (Department of Economics, University of Helsinki; CESifo, Munchen and IZA Bonn, Germany)

  • Rune Stenbacka

    (Hanken School of Economics, Helsinki, Finland)

  • Mikael Juselius

    (Hanken School of Economics, Helsinki, Finland and BIS, Basel)

Abstract

We study the effects of labour market imperfections and the capital stock on equilibrium unemployment. With an exogenous capital-labour ratio, stronger labour market imperfections promote equilibrium unemployment. However, the relationship between the long-run unemployment and the capital stock is not monotonic. With sufficiently strong (weak) labour market imperfections capital investment has a wage-moderating (wage-increasing) effect, thereby decreasing (increasing) equilibrium unemployment. Empirically we find dispersed long-run effects of capital on unemployment, using 28 years of quarterly data, in 16 OECD countries. A significant part of this dispersion can be explained by differences in labour market conditions among the countries.

Suggested Citation

  • Erkki Koskela & Rune Stenbacka & Mikael Juselius, 2013. "Equilibrium Unemployment with Capital Investments under Labour Market Imperfections," Finnish Economic Papers, Finnish Economic Association, vol. 26(2), pages 72-94, Autumn.
    • Handle: RePEc:fep:journl:v:26:y:2013:i:2:p:72-94
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • 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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