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Capital Expansion, Endogenous Growth and Equilibrium Unemployment
Author(s) -
Hoon Hian Teck
Publication year - 1998
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.00019
Subject(s) - economics , endogenous growth theory , unemployment , natural rate of unemployment , labour economics , general equilibrium theory , full employment , capital deepening , capital accumulation , elasticity of substitution , capital (architecture) , investment (military) , macroeconomics , unemployment rate , production (economics) , capital formation , human capital , financial capital , market economy , history , archaeology , politics , political science , law
A model is developed, which captures the interactions of unemployment and economic growth in general equilibrium. The economy evolves along a correct‐expectations equilibrium path exhibiting endogenous job rationing, and productivity growth is driven by installation of new capital. Under the maintained hypothesis that the elasticity of substitution between capital and labour is less than unity, unemployment benefits are shown to shift up the whole path of equilibrium unemployment, leaving the economy with a higher natural rate of unemployment and lowering the long‐run growth rate permanently. Investment tax credits financed by lump sum taxes on total income are capable of lowering the natural rate and raising the economy's growth rate.