Unemployment, Capital-Labor Substitution, and Economic Growth

IMF Working Papers, March 1, 1999

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Unemployment, Capital-Labor Substitution, and Economic Growth

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Bibliographic details

• Authors: Bob Rowthorn
• Published: March 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451846300.001

Summary

• 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.
• The impact of these factors 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 considers modifications to the analysis to take into account Keynesian ideas concerning the role of aggregate demand.
• Conclusion: 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.

Major findings and analytical themes

• The elasticity of substitution between capital and labor is a central determinant of how capital formation, technical progress, and labor force expansion affect:
  • income distribution,
  • the NAIRU (equilibrium unemployment),
  • and the scope for demand-side policy.
• Short-run versus long-run distinction:
  • Short-run NAIRU: capital stock treated as exogenous.
  • Long-run NAIRU: capital stock treated as endogenous.
• Keynesian considerations:
  • Aggregate demand influences the analysis and alters implications for the scope of demand stimulation.

Policy implications and scenarios

• If capital stock does not grow in line with labor supply in efficiency units:
  • The short-run NAIRU will increase.
  • The increase in short-run NAIRU will reduce the effectiveness and scope for demand stimulation.
• Implicit policy attention:
  • Aligning capital formation with labor supply in efficiency units is necessary to avoid upward pressure on the short-run NAIRU and to preserve room for demand-side policies.

Subject coverage and keywords

• Subject: Employment, Labor, Labor demand, Real wages, Unemployment, Wages
• Keywords: Bargaining, Capital, capital formation, capital stock, demand curve, Elasticity of Substitution, Employment, equilibrium unemployment, Europe, impact wage settlement, Labor demand, money wage, product market, Real wages, Technical Progress, Unemployment, wage bargainer, wage cut, wage determination, wage rate, wage-price spiral, Wages, WP

Content in this bundle

• Unemployment, Capital-Labor Substitution, and Economic Growth - WP/99/43
  • Unemployment, Capital-Labor Substitution, and Economic Growth - WP/99/43 (Markdown version)
  • Unemployment, Capital-Labor Substitution, and Economic Growth - WP/99/43 (PDF)