Growth and Employment in Europe: Sustainability and Competitiveness, Department of Economics, WU (Wirtschaftsuniversität Wien)
Is There an Equilibrium Rate of Unemployment in the Long Run?
Abstract: Distinguishing between profit led and growth led demand
regimes, we analyze the conditions of existence and stability of long run
equilibrium of unemployment. The model we employ has at its center the
relation between growth and distribution. Growth can be either wage led or
profit led. Distribution itself is a function of the unemployment rate,
with higher unemployment leading to a higher profit share. We use Okun's
Law to close the model, making the change of the rate of unemployment a
function of growth. The interesting result of our analysis is that in
profit led demand regime the short run and long run equilibrium are stable.
However, if the demand regime is wage led, the same conditions that
guarantee stability of the goods market equilibrium in the short run render
impossible the existence of a long run equilibrium rate of unemployment,
and vice versa. Thus, if Kalecki's proposition that higher wages lead to
higher growth is true, there will be no equilibrium rate of unemployment in
the long run that serves as an anchor for the economic system. A revised
version of the paper is forthcoming in the Review of Political Economy.
Please contact the author for the revised version.
Keywords: growth theory; unemployment; keynesian economics; (follow links to similar papers)
JEL-Codes: E12; E24; (follow links to similar papers)
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