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Equilibrium Unemployment with Capital Investments under Labour Market Imperfections

Erkki Koskela, Rune Stenbacka () and John Juselius
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Rune Stenbacka: Hanken School of Economics, Helsinki, Finland

Finnish Economic Papers, 2013, vol. 26, issue 2, 72-94

Abstract: We study the effects of labour market imperfections and the capital stock on equilibrium unemployment. With an exogenous capital-labour ratio, stronger labour market imperfections promote equilibrium unemployment. However, the relationship between the long-run unemployment and the capital stock is not monotonic. With sufficiently strong (weak) labour market imperfections capital investment has a wage-moderating (wage-increasing) effect, thereby decreasing (increasing) equilibrium unemployment. Empirically we find dispersed long-run effects of capital on unemployment, using 28 years of quarterly data, in 16 OECD countries. A significant part of this dispersion can be explained by differences in labour market conditions among the countries.

JEL-codes: E22 E24 J51 L11 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:fep:journl:v:26:y:2013:i:2:p:72-94