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Capital Investment and Equilibrium Unemployment

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  • Jósef Sigurdsson

Abstract

Econometric analysis of cross-country data reveals a robust long-term relationship between capital investment and unemployment. This paper studies this relationship within a search and matching model of the labor market. In the model developed, firms employ labor for two purposes: for production of a final good and for production of capital. Quantitative analysis shows that an increase in growth of capital-production technology increases capital formation and employment in capital production, reducing unemployment in equilibrium. The model is therefore successful in generating the negative long-run investment-unemployment relationship found in macroeconomic data.

Suggested Citation

  • Jósef Sigurdsson, 2013. "Capital Investment and Equilibrium Unemployment," Economics wp61, Department of Economics, Central bank of Iceland.
    • Handle: RePEc:ice:wpaper:wp61
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    References listed on IDEAS

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    Cited by:

    1. Hegeland, Erik & Taalbi, Josef, 2019. "What determines unemployment in the long run? Band spectrum regression on ten countries," Lund Papers in Economic History 203, Lund University, Department of Economic History.
    2. Hegelund, Erik & Taalbi, Josef, 2023. "What determines unemployment in the long run? Band spectrum regression on ten countries 1913–2016," Structural Change and Economic Dynamics, Elsevier, vol. 64(C), pages 144-167.
    3. Ioanna C. Bardakas, 2016. "Structural and cyclical factors of Greece’s current account balances: a note," Working Papers 206, Bank of Greece.
    4. Nicos Christodoulakis & Christos Axioglou, 2017. "Underinvestment and Unemployment: The Double Hazard in the Euro Area," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 63(1), pages 49-80.
    5. Ramesh CHANDRA DAS & Kamal RAY, 2019. "Long Run Relationships And Short Run Dynamics Among Unemployment And Demand Components: A Study On Sri Lanka, India And Bangladesh," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(1), pages 107-120, June.

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