The Capital Stock and Equilibrium Unemployment: A New Theoretical Perspective

Sujit Kapadia

No 181, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: By assuming Cobb-Douglas production technology, many well-known imperfectly competitive macroeconomic models of the labour market (e.g. Layard, Nickell and Jackman, 1991) imply that equilibrium unemployment is independent of the capital stock. This paper introduces a new notion of capacity into the standard framework. Specifically, we adapt the Cobb-Douglas production function so that when the capital-labour ratio drops below a certain threshold, the returns to labour fall while the returns to capital increase. Using this assumption, we show that equilibrium unemployment depends on the capital stock over a certain range. We also briefly discuss the generalisation for an endogenous capital stock.

Keywords: Unemployment; Capital Stock; Investment; Capacity; Technology. (search for similar items in EconPapers)
JEL-codes: E22 E23 E24 E25 J64 (search for similar items in EconPapers)
Date: 2003-12-01
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Working Paper: The Capital Stock and Equilibrium Unemployment: A New Theoretical Perspective (2004)
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