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Labor Market Frictions, Investment and Capital Flows

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  • Clemens C. Struck

Abstract

The standard neoclassical model predicts that countries with higher productivity growth rates experience sharp increases in investment that are followed by rapid declines. This investment response contrasts with the empirical evidence that suggests a rather hump-shaped investment behavior. In this paper, I present a two-country general equilibrium model that generates hump-shaped investment responses from labor market frictions. In the model, I decompose investment into tradable and non-tradable components and show that an increase in the growth rate of a country results in scarcities of the non-tradable components which raise the relative price of investment goods. These scarcities occur because labor is unable to reallocate quickly between sectors within economies.

Suggested Citation

  • Clemens C. Struck, 2017. "Labor Market Frictions, Investment and Capital Flows," Working Papers 201729, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:201729
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    File URL: http://hdl.handle.net/10197/9442
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    More about this item

    Keywords

    Investment prices; Capital flows; Current account; Global imbalances; Capital returns; Labor market frictions; Trade frictions;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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