School of Economics and Finance

No. 476: Unemployment Invariance

Marika Karanassou , Queen Mary, University of London
Dennis J. Snower , Birkbeck, University of London

December 1, 2002

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This paper provides a critique of the "unemployment invariance hypothesis", according to which the behavior of the labor market ensures that the long-run unemployment rate is independent of the size of the capital stock, productivity, and the labor force. Using Solow growth and endogenous growth models, we show that the labor market alone need not contain all the equilibrating mechanisms to ensure unemployment invariance; in particular, other markets may perform part of the equilibrating process as well. By implication, policies that raise the growth path of capital or increase the effective working-age population may influence the long-run unemployment rate.

J.E.L classification codes: J21, J23, J30, J38, J64, J68

Keywords:Unemployment, Employment, Wage determination, Labor supply, Capital accumulation, Productivity, Technological change, Economic growth