Faculty of Economics and Business Administration Publications Database

Unemployment, Factor Substitution and Capital Formation

von Thadden, Leopold
Volume: 4
Pages: 475 - 495
Month: November
ISSN-Print: 1465-6485
Link External Source: Online Version
Year: 2003
Keywords: Wage bargaining; Unemployment; Overlapping generations

We incorporate a wage-bargaining structure in a dynamic general equilibrium model and show how this feature changes short- and long-run properties of equilibria compared with a perfectly competitive setting. We discuss how employment, capital and income shares respond to wage-setting shocks and show that adjustment dynamics depend decisively on the magnitude of the elasticity of substitution between labour and capital. Values of the elasticity below unity add persistence, tend to preserve stability and lead to empirically plausible adjustment patterns. By contrast, values above unity introduce additional volatility, thereby making steady states potentially unstable. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd 2003.