THE CAPITAL STOCK AND EQUILIBRIUMUNEMPLOYMENT: A NEW THEORETICAL PERSPECTIVE

By assuming Cobb-Douglas production technology, many well-known imperfectlycompetitive macroeconomic models of the labour market (e.g. Layard, Nickell andJackman, 1991) imply that equilibrium unemployment is independent of the capitalstock. This paper introduces a new notion of capacity into the standard framework.Specifically, we adapt the Cobb-Douglas production function so that when the capitallabourratio drops below a certain threshold, the returns to labour fall while the returnsto capital increase. Using this assumption, we show that equilibrium unemploymentdepends on the capital stock over a certain range. We also briefly discuss thegeneralisation for an endogenous capital stock....