The Rise of Unemployment in Europe

The Rise of Unemployment in Europe

A Keynesian Approach

New Directions in Modern Economics series

Engelbert Stockhammer

This book offers a long overdue and refreshing Keynesian approach to the rise of European unemployment. It critically discusses the NAIRU theory and presents econometric evidence to assess the relative importance of capital investment and labor market institutions. The author also explores the reasons for the slowdown in capital accumulation, and is able to establish a clear link between changes in the financial sector, changes in corporate governance and investment expenditures.

Chapter 2: Profits and Unemployment: Is There an Equilibrium Rate of Unemployment in the Long Run?

Engelbert Stockhammer

Subjects: economics and finance, labour economics, post-keynesian economics


2. Profits and unemployment: is there an equilibrium rate of unemployment in the long run? 2.1 INTRODUCTION Most of the literature on European unemployment is built on the premise that there has been an increase in the long-run equilibrium rate of unemployment, the NAIRU. This increase in the NAIRU, so the story goes, is caused by wage-push factors like an overgenerous welfare state, long and durable unemployment benefits and job protection measures. In short, by labour market inflexibility, which translates into real wage rigidity. In this chapter we develop a Post-Keynesian growth model that explicitly treats the labour market and allows for an effect of unemployment on income distribution. This will allow us to investigate the claims of the NAIRU theory. In particular we seek answers to the following questions. Is there an equilibrium rate of unemployment in the long run? If so, can it be reduced by increasing labour market flexibility? Is it independent of demand? The chapter is organized as follows. In the remainder of this introduction, the core features of the NAIRU model are summarized and the differences to our own assumptions are clarified. In section 2, Keynesian growth models are discussed, with a particular focus on the distinction between Robinsonian (full-capacity) models and Kaleckian (excess-capacity) models. The Marglin-Bhaduri model is the most modern formulation of the latter and forms the basis for the growth model to be developed in section 3. We add an employment function (Okun’s law) and a...

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