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Unemployment, Factor Substitution, and Capital Formation

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Abstract

We incorporate a wage bargaining structure in a dynamic general equilibrium model and show how this feature changes short and long-run properties of equilibria compared with a perfectly competitive setting. We discuss how employment, capital, and income shares respond to wage setting shocks and show that adjustment dynamics depend decisively on the magnitude of the elasticity of substitution between labour and capital. Values of the elasticity below unity add persistence, tend to preserve stability, and lead to empirically plausible adjustment patterns. By contrast, values above unity introduce additional volatility, thereby making steady states potentially unstable.

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  • Leo Kaas & Leopold von Thadden, 2001. "Unemployment, Factor Substitution, and Capital Formation," Vienna Economics Papers vie0102, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie0102
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    Cited by:

    1. Martin Hellwig, 2004. "The Relation between Real Wage Rates and Employment: An Intertemporal General‐ Equilibrium Analysis," German Economic Review, Verein für Socialpolitik, vol. 5(3), pages 263-295, August.
    2. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2004. "Factor substitution and factor augmenting technical progress in the US: a normalized supply-side system approach," Working Paper Series 367, European Central Bank.
    3. Takashi Ohno, 2006. "On the Effects of Wage Pressure on the Unemployment Rate and Capital Share," German Economic Review, Verein für Socialpolitik, vol. 7, pages 389-401, November.
    4. Koskela Erkki & Thadden Leopold von, 2008. "Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective," German Economic Review, De Gruyter, vol. 9(2), pages 135-159, May.
    5. José Ramón García & Valeri Sorolla, 2014. "Monopolistic Competition and Different Wage Setting Systems," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(1), pages 48-77, February.
    6. Tetsuo Ono, 2010. "Growth and unemployment in an OLG economy with public pensions," Journal of Population Economics, Springer;European Society for Population Economics, vol. 23(2), pages 737-767, March.
    7. Takashi Ohno, 2006. "On the Effects of Wage Pressure on the Unemployment Rate and Capital Share," German Economic Review, Verein für Socialpolitik, vol. 7(4), pages 389-401, November.
    8. Xavier Raurich & Valeri Sorolla, 2008. "A General Framework for Growth Models with Non-Competitive Labor and Product Markets and Disequilibrium Unemployment," Working Papers 369, Barcelona School of Economics.
    9. Ono, Tetsuo, 2019. "Growth, Unemployment, And Fiscal Policy: A Political Economy Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 23(8), pages 3099-3139, December.
    10. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
    11. Jakub Growiec & Peter McAdam & Jakub Mućk, 2021. "On the Optimal Labor Income Share," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-52, October.
    12. Tetsuo Ono, 2007. "Unemployment dynamics in an OLG economy with public pensions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(3), pages 549-577, December.
    13. Yumei Liu & Wuyang Hu & Simon Jetté-Nantel & Zhihong Tian, 2014. "The Influence of Labor Price Change on Agricultural Machinery Usage in Chinese Agriculture," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 62(2), pages 219-243, June.

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    More about this item

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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