Population, Unemployment and Economic Growth Cycles: A Further Explanatory Perspective

In this paper we investigate the dynamic interaction between economic growth, unemployment, income distribution and population growth. The reference framework combines rational behaviour of agents with endogenous fertility and unemployment, while profits are the determinant of the accumulation of firms. In particular the supply of labour is determined by the micro‐founded fertility choices of individuals. We first demonstrate, consistently with the empirical evidence, the existence of a positive income growth trend with sustained oscillations, therefore providing an alternative explanation of the relation between growth and cycle. Moreover interesting results are given on the relation between unemployment and growth. So far the literature has traditionally shown a negative relation between unemployment and growth (with the exception of the positive relation arising in a Schumpeter ‘creative’ disruption context). In contrast, we find a twofold effect of unemployment (via its effects on population) on economic growth: this can be both positive or negative depending on the relative level of the cost of childrearing of employed and unemployed persons, and on the level of unemployment benefits. This allows us to argue that an increase in unemployment benefit—as has occurred in recent years in many countries such as France and Spain—could lead to wide demo‐economic fluctuations and to a positive effect of unemployment on economic growth.