Capital Accumulation and Unemployment: New Insights on the Nordic Experience

28 Pages Posted: 31 Oct 2007

See all articles by Marika Karanassou

Marika Karanassou

University of London, Queen Mary - Department of Economics; Institute for the Study of Labor (IZA)

Hector Sala

Autonomous University of Barcelona - Department of Applied Economics; IZA Institute of Labor Economics

Pablo F. Salvador

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

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Date Written: September 2007

Abstract

This paper takes a fresh look at the analysis of labour market dynamics and argues that capital accumulation plays a fundamental role in shaping unemployment movements. This role has generally been examined by considering indirect transmission channels of the capital stock effects, i.e. using variables like interest rates or investment ratios in the estimation of single-equation unemployment rate models. Here we advocate a different approach. We directly estimate the effects of capital stock in the labour market by applying the chain reaction theory of unemployment, and we find that capital stock is a major determinant of unemployment in the Nordic countries. In particular, the different unemployment experiences of these economies derive from the temporary (albeit prolonged) negative shocks to capital stock growth in Denmark and Sweden, and the permanent downturn of capital stock growth in Finland. We are thus able to explain why the crisis of the early 1990s had a more acute impact in Finland than in its twin economy, Sweden.

Keywords: unemployment dynamics, chain reaction theory, capital accumulation, Nordic countries

JEL Classification: E22, E24, J21

Suggested Citation

Karanassou, Marika and Sala Lorda, Hector and Salvador, Pablo F., Capital Accumulation and Unemployment: New Insights on the Nordic Experience (September 2007). IZA Discussion Paper No. 3066, Available at SSRN: https://ssrn.com/abstract=1025889

Marika Karanassou

University of London, Queen Mary - Department of Economics ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 20 7975 5090 (Phone)
+44 20 7983 3580 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Hector Sala Lorda (Contact Author)

Autonomous University of Barcelona - Department of Applied Economics ( email )

Departament d'Economia Aplicada
Bellaterra, 08193
Spain
+34 93 581 2779 (Phone)
+34 93 581 2292 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Pablo F. Salvador

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

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