Working Papers,
Vienna University of Economics and Business Research Group: Growth and Employment in Europe: Sustainability and Competitiveness

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

JEL-codes: E12; E24 February 2000

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