published in: German Economic Review, 2004, 5 (3), 297-317
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 need not contain all
the equilibrating mechanisms to ensure unemployment invariance and that other markets
may perform part of the equilibrating process as well. By implication, policies that stimulate
investment and R&D and policies that affect the size of the labor force may influence the
long-run unemployment rate. Layard-Nickell-Jackman “invariance condition” for labor market
systems. This condition is meant to ensure that unemployment is not trended in response to
growth in the capital stock, the labor force, or productivity.
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