Publication Type

Journal Article

Version

acceptedVersion

Publication Date

7-2023

Abstract

We estimate the medium-term relationship between investment and unemployment over the period 1960–2017 in 20 OECD countries, a period that includes the years of the Great Recession. While neoclassical growth theory typically assumes full employment—with no effect of investment on unemployment—and New-Keynesian models assume that such a relationship only exists in the short term at business cycle frequencies, we find that over our sample period covering more than 5 decades, a statistically significant negative relationship does exist: in decades when investment fell, unemployment increased. Panel estimation, using a measure of stock market volatility as an instrument for investment, confirms the negative relationship between investment and unemployment. High stock market volatility and low investment are associated with high unemployment, other things equal. The evidence supports both Keynes' ideas about an unemployment equilibrium as well as more recent investment-based theories of the natural rate of unemployment.

Keywords

Current account, great recession, investment, long swings of enemployment

Discipline

Finance | Labor Economics

Research Areas

Applied Microeconomics

Publication

Economics of Transition and Institutional Change

Volume

31

Issue

3

First Page

611

Last Page

632

ISSN

2577-6975

Identifier

10.1111/ecot.12350

Publisher

Wiley

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1111/ecot.12350

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