Unemployment, Capital-Labor Substitution, and Economic Growth

Bob Rowthorn

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Economic Theory and Policy Monetary Policy and Economic Impact Unemployment and Economic Growth

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.

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References

1992Unemployment: macroeconomic performance and the labour market 1969Real Wages, Employment, and Inflation 1992European Unemployment: A Survey 1997The Medium Run 1977Conflict, inflation and money 1999Unemployment, wage bargaining and capital-labour substitution 1986The Rise in Unemployment: A Multi-Country Study 1986The Wage Price Spiral

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