The Dynamics of Unemployment, Capacity Constraints and Demand Shortages

This paper presents an intertemporal model in which the agents may face different quantity constraints resulting from technological rigidities, microeconomic uncertainty and market segmentation. Its main purpose is to derive the path of the unemployment rate, the rate of capacity utilisation and the proportion of firms reporting demand constrains from a union-firm optimisation programme. The model is calibrated and the impact of different unfavourable shocks is simulated using a new algorithm for solving dynamic non-linear models. The present exercise outlines how cautious the interpretation of business survey indicators should be.