Capital investment and equilibrium unemployment

Abstract

Econometric analysis of cross-country data reveals a robust long-term relationship between capital investment and unemployment. This paper studies this relationship within a search and matching model of the labor market. In the model developed, ?rms employ labor for two purposes: for production of a ?nal good and for production of capital. Quantitative analysis shows that an increase in growth of capital-production technology increases capital formation and employment in capital production, reducing unemployment in equilibrium. The model is therefore successful in generating the negative long-run investment-unemployment relationship found in macroeconomic data.