Underinvestment and unemployment: the double hazard in the euro area

Nicos Christodoulakis and Christos Axioglou
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Christos Axioglou: Ministry of Finance, Greece

No 205, Working Papers from Bank of Greece

Abstract: An alarming legacy of the austerity programs in the euro area is the vast disinvestment that has taken place over the recent years, and especially so in the peripheral economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but also undermines the prospects of a gradual reduction of unemployment and risks further imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model with labour market imperfections, the paper shows that unemployment is a function of capital investment under either CES or Cobb-Douglas production functions. A cross-section estimate for the euro area economies confirms the theoretical findings.

Keywords: euro area; investment; unemployment; capital-labour substitution; production function (search for similar items in EconPapers)
JEL-codes: E22 E24 (search for similar items in EconPapers)
Pages: 43
Date: 2016-04
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pke
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Journal Article: Underinvestment and Unemployment: The Double Hazard in the Euro Area (2017)
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