A theoretical note on the supermultiplier approach in a labor-constrained economy

Jorge Thompson Araujo and João Gabriel de Araujo Oliveira

Chapter 6 in Income Distribution, Economic Growth and Unemployment, 2025, pp 127-137 from Edward Elgar Publishing

Abstract: This chapter discusses a potential inconsistency in the treatment of the supply side under the supermultiplier approach. More specifically, it shows that, in the case where labor is the restricting factor of production, the accelerator mechanism does not provide a satisfactory framework with which to analyze investment behavior, as it drives the economy towards over-accumulation of capital – a form of dynamic inefficiency. Although countervailing effects are considered, including exogenous labor-augmenting technological progress, they are not sufficient to fully offset tendencies towards excessive capital accumulation. The chapter also stresses that long-period output will not be purely demand-driven in a supermultiplier-type model when labor is the binding constraint under a Leontief technology. Instead, it will be determined through the interplay of aggregate supply and demand. The above findings imply that the usual results of supermultiplier-type models are highly dependent on the conventional assumption that capital is the restricting factor.

Keywords: Leontief technology; Supermultiplier; Investment accelerator; Labor-constrained economy; Aggregate supply and demand (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035342556
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