Unemployment, Factor Substitution and Capital Formation |
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Authors: | Leo Kaas Leopold von Thadden |
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Affiliation: | University of Vienna. Deutsche Bundesbank |
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Abstract: | Abstract. 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. |
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Keywords: | D51 E24 E25 |
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