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Unemployment and Productivity Growth: An Empirical Analysis within the Augmented Solow Model

  • Bräuninger, Michael

    ()

  • Pannenberg, Markus

    ()

    (Bielefeld University of Applied Sciences)

Does a country’s level of unemployment have an impact on the long-run growth rate? Incorporating unemployment into a generalised augmented Solow-type growth model, yields some answers to this question. In particular, we show that the impact of unemployment on productivity growth heavily depends on the influence of human capital in the production function. In the traditional Solow model, unemployment has neither an influence on long-run productivity growth nor on the long-run level of productivity. However, if human capital matters, unemployment has a long-run effect on the level of productivity. Moreover, if we allow for endogenous growth within our theoretical framework, unemployment has an impact on long-run productivity growth. Using data from 13 OECD countries from 1960 to 1990 within a dynamic panel data framework, we find supportive evidence that an increase in unemployment indeed reduces the long-run level of productivity. Taken at face value our results suggest that if unemployment would have remained at the level of 1960 then productivity today would be roughly 10% higher than it is.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 136.

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Length: 34 pages
Date of creation: Mar 2000
Date of revision:
Publication status: published in: Economic Modelling, 2002, 19 (1), 105-120; see IZA Reprints 112/02
Handle: RePEc:iza:izadps:dp136
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  1. C Bean & Christopher A. Pissarides, 1992. "Unemployment, Consumption and Growth," CEP Discussion Papers dp0100, Centre for Economic Performance, LSE.
  2. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
  3. Robert J. Gordon, 1980. "The "End-of-Expansion" Phenomenon in Short-run Productivity Behavior," NBER Working Papers 0427, National Bureau of Economic Research, Inc.
  4. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. " Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-89, September.
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