Unemployment, Factor Substitution, and Capital Formation

Leo Kaas () and Leopold von Thadden

No 2001,01, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank, Research Centre

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.

Keywords: Wage bargaining; Unemployment; Overlapping generations (search for similar items in EconPapers)
JEL-codes: E25 E24 D51 (search for similar items in EconPapers)
Date: 2001
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Related works:
Working Paper: Unemployment, Factor Substitution, and Capital Formation (2001)
Journal Article: Unemployment, Factor Substitution and Capital Formation (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:zbw:bubdp1:4147

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