Unemployment and Capacity Under-Utilisation in a Tobin’s q Model

A dynamic contracting model with endogenous prices, wages and investment is presented. It accounts for capital and labour underutilization at steady state and displays various patterns of unemployment rate and capacity utilization rate co-movements as a function of demand and supply shocks. The main determining elements of unemployment are the unit cost of capital, the intensity of competition in the product market, the magnitude of uncertainty and union characteristics.