Research Discussion Papers, Bank of Finland
No 11/2004:
Equilibrium unemployment and investment under product and labour market imperfections
Heikki Kauppi ()
, Erkki Koskela ()
and Rune Stenbacka ()
Abstract: The study looks at the implications of product market
competition and investment for price setting, wage bargaining and thereby
for equilibrium unemployment in an economy with product and labour market
imperfections. We show that intensified product market competition will
reduce equilibrium unemployment, whereas the effect of increased capital
intensity is more complex. Higher capital intensity will decrease the
equilibrium unemployment when the elasticity of substitution between
capital and labour is less than one, while the reverse happens when this
elasticity is higher than one, but smaller than the elasticity of
substitution between products. Finally, we demonstrate how labour and
product market imperfections, characterised by the wage and price setting
mark-ups, affect the optimal capital stock. Our findings raise important
questions for future empirical research.
Keywords: equilibrium unemployment; product market imperfections; investment; wage bargaining; (follow links to similar papers)
JEL-Codes: E22; E24; J51; L11; (follow links to similar papers)
40 pages, January 14, 2004
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