Unemployment, Capital-Labor Substitution, and Economic Growth

Bob Rowthorn

No 1999/043, IMF Working Papers from International Monetary Fund

Abstract: This paper discusses the influence of economic growth on the equilibrium unemployment rate (NAIRU). It examines how income distribution and the NAIRU are influenced by capital formation, technical progress, and labor force expansion, and how these factors’ impact depends on the elasticity of substitution between capital and labor. The paper distinguishes between the short-run NAIRU when capital stock is exogenous, and the long-run NAIRU when it is endogenous. It also considers how the analysis must be modified to take into account Keynesian ideas concerning the role of aggregate demand. It concludes that unless the capital stock grows in line with labor supply in efficiency units, the short-run NAIRU will increase, reducing the scope for demand stimulation.

Keywords: WP; demand curve; capital stock; product market; capital formation; equilibrium unemployment; Unemployment; Capital; Elasticity of Substitution; Bargaining; Technical Progress; money wage; impact wage settlement; wage cut; wage bargainer; wage-price spiral; wage determination; wage rate; Wages; Real wages; Labor demand; Employment; Europe (search for similar items in EconPapers)
Pages: 38
Date: 1999-03-01
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Citations: View citations in EconPapers (16)

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