Unemployment, Factor Substitution, and Capital Formation
University of Konstanz - Faculty of Economics and Statistics; Institute for the Study of Labor (IZA)
Leopold Von Thadden
European Central Bank (ECB)
Deutsche Bundesbank ERC Working Paper No. 01
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.
Number of Pages in PDF File: 34
Keywords: Wage Bargaining, Unemployment, Overlapping Generations
JEL Classification: D51, E24, E25working papers series
Date posted: April 30, 2001
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