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The Rise of Unemployment in Europe

A Keynesian Approach

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.
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Chapter 7: Policy Conclusions

Engelbert Stockhammer


7.1 INTRODUCTION This book developed a Keynesian explanation of the rise of European unemployment from the 1960s to the 1990s. The work is motivated by the dissatisfaction with the mainstream NAIRU explanation of European unemployment. Chapter 2 proposed a theoretical model that incorporates a negative effect of unemployment on the wage share (reserve army effect) into a flexible Post-Keynesian growth model. Chapter 4 tested the employment function that this model implied and contrasted it with the NAIRU story of European unemployment. In the Keynesian explanation, the slowdown of accumulation is the major cause of the rise of European unemployment. Therefore the reasons for the slowdown of accumulation are of interest. Chapter 5 argued that financialization, that is the changing relation between the financial and the industrial sector, may have played an important role. The shareholder revolution aligned management’s interests with those of shareholders, causing a shift of management priorities from growth to profits. Finally, the argument that financialization has a negative effect on investment was tested econometrically in Chapter 6. In the remainder of this conclusion we will summarize the key findings of each chapter, and then draw some policy conclusions. 7.2 A SUMMARY Traditionally Keynesians, arguably Keynes himself, but certainly Kaldor and Robinson, regarded income distribution as an outcome of variables on the goods market, such as investment decisions and savings propensities. The model presented in Chapter 2 differs from other Post-Keynesian growth models in that a reserve army effect, that is a...

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