Growth and unemployment

This Chapter completes the analysis of the previous one by inserting both growth and unemployment into the analysis. Even though the two variable are correlated, the so called Okun's law being a measure, this does not imply that their co-presence does not improve the analysis. In particular, unemployment, which is not determined in a model grounded on the NAIRU, not only affects supply, as is well known in the literature, but it may have an impact on aggregate demand via an inequality and poverty channel. In fact, the restrictions imposed on the welfare system, has had a deep impact on the consumption function, which, for a given rate of growth, depends negatively on the amount of unemployment not covered by welfare measures, which impacts negatively on the overall propensity to consume. The co-presence of growth and unemployment may generate multiple equilibria in the system. This means that history enters into the analysis via initial conditions, making the distinction PLM (profit-led models) versus WLM (wage-led model) less straightforward.