Capital accumulation and unemployment: new insights on the Nordic experience

This paper takes a fresh look at the analysis of labour market dynamics and argues that capital accumulation plays a fundamental role in determining unemployment movements. This role has generally been examined by considering indirect transmission channels of the capital stock effects, i.e. using va...

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Bibliographic Details
Published in:Cambridge journal of economics 2008-11, Vol.32 (6), p.977-1001
Main Authors: Karanassou, Marika, Sala, Hector, Salvador, Pablo F.
Format: Article
Language:English
Subjects:
Capital accumulation
Capital formation
Capital stock
Capital stocks
Economic conditions
Economic recessions
Economic theory
Employment
Foreign exchange rates
Growth capital
Interest rates
Labor demand
Labor market
Labor markets
Labour economics
Labour market
Macroeconomics
Nordic countries
Productivity
Studies
Unemployment
Unemployment rates
Variables
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Summary:This paper takes a fresh look at the analysis of labour market dynamics and argues that capital accumulation plays a fundamental role in determining 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 NAIRU framework. 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.
ISSN:0309-166X
1464-3545
DOI:10.1093/cje/ben022