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Demand-Supply Interactions and Unemployment Dynamics: Can there be Path Dependency ? The Case of Belgium, 1955-1994

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  • Shadman-Mehta, Fatemeh

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Sneessens, Henri R.

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); Université catholique de Lille)

Abstract

The proportion of capacity-constrained firms in European economies remains today fairly small, which suggests that capacity shortages cannot be the direct and single cause of unemployment persistence. Inferring from this observation that low investment rates play no role in explaining the persistence of high unemployment rates may however fail to take into account the relationship between demand expectations, capital accumulation and real rigidities. The objective of this paper, is to show how a continuum of excess-supply equilibria can be obtained, in models with real rigidities, similar to those traditionally used to analyse the determinants of equilibrium unemployment (the NAIRU), provided one takes explicitly into account the effect of a ``capital gap" on wage formation, and the relationship between capital accumulation and demand expectations. Such a persistence mechanism might contribute to explain why current unemployment rates seem to depend so much on past history, and why there is no simple explanation that applies equally well to all European countries. The results obtained from an empirical analysis of Belgian post-war data are compatible with such a scenario.

Suggested Citation

  • Shadman-Mehta, Fatemeh & Sneessens, Henri R., 1998. "Demand-Supply Interactions and Unemployment Dynamics: Can there be Path Dependency ? The Case of Belgium, 1955-1994," LIDAM Discussion Papers IRES 1998017, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:1998017
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    References listed on IDEAS

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    Cited by:

    1. Jacques Drèze, 2001. "On the Macroeconomics of Uncertainty and Incomplete Markets," International Economic Association Series, in: Jacques Drèze (ed.), Advances in Macroeconomic Theory, chapter 3, pages 30-55, Palgrave Macmillan.
    2. DREZE, Jacques H. & DURRE, Alain & SNEESSENS, Henri R., 2000. "Investment stimulation, with some reference to housing," LIDAM Reprints CORE 1483, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Cockx, Bart, 1999. "The Design of Active Labour Market Policies. What Matters and What Doesn't ?," LIDAM Discussion Papers IRES 1999035, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    4. Bart COCKX, 2000. "The design of active labour market policies: Building in effective incentives," International Labour Review, International Labour Organization, vol. 139(4), pages 457-480, December.

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    More about this item

    Keywords

    Equilibrium unemployment; NAIRU; capital shortage; hysteresis; cointegration;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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