Presenter’s Name & Job Title | Date

Capital accumulation, labour market institutions and unemployment in the medium run

Engelbert Stockhammer* & Erik Klär**

*Kingston University, **University of Trier

2

Unemployment Rate, EU15

0

2

4

6

8

10

12

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

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Motivation

“broad movements in unemployment across the OECD can be explained by shifts in labour market institutions” Nickell et al 2005 (EJ), 1

“The theory can be summed up by saying given the psychology of the public, the level of output and employment as a whole depends on the amount of investment.” Keynes 1937 (QJE), 221

4

Overview Mainstream view: Medium-run (‚natural‘)

unemployment is primarily due to protective labour market institutions (potentially in interaction with adverse macroeconomic shocks)

Empirical validity called into question recently OECD (2006) much more nuanced compared to its

previous position (e.g. OECD Jobs Study 1994) Howell et al (2007), Baccaro & Rei (2007) Back to the question: What are causes of medium-run

unemployment? Contribution of the paper

estimates u(LMI, MS, K) in 20 OECD countries in a medium-run panel (5-year-averages) using two LMI data sets and standard macro shocks and capital accumulation (K/K)

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Outline

Motivation, theoretical background Empirical literature Results

Bassanini-Duval (BD) dataset BGHS dataset Interactions among LMI Illustrating contributions Capital stock or investment?

Conclusion

Theoretical background

Basic theoretical vision Actual unemployment is determined by demand, most

importantly investment expenditures At any point in time there is a well-defined NAIRU (= a

short-run Phillips curve) NAIRU is neither exogenous nor a strong attractor for

actual unemployment NAIRU gets dragged along with actual unemployment

Based on the work by Rowthorn, Arestis, Sawyer Related papers:

Stockhammer 2008 Metroeconomica Stockhammer 2011 Oxfd Rev Ec Policy

7

Standard NAIRU model

Demand (y)(goods markets)

NAIRU (UN)

Actual Unemployment (u)

Δp

LMI

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Keynes‘ approach

Demand (y)(goods markets)

Actual Unemployment (u)

Δp WSCapital

accumulation (ΔK)

Interest rates

„animal spirits“

A modern Keynesian approach

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Demand (y)(goods markets)

NAIRU (UN)

Actual Unemployment (u)

Δp WS

LMI

Capital accumulation

(ΔK)

Interest rates (iCB)

A NAIRU model

Wage setting Price setting Phillips Curve Unemployment NAIRU Is the NAIRU endogenous or exogenous? Medium-unemployment

NAIRU endogeneity

Standard arguments: deskilling, stigmatising ...Endogenous wage aspirations: workers (and the unemployed)

regard wage of other workers as „normal“ and/or get used to current wage level Difference to NK persistence: Not weak wage effects of long-

term unemployed, but a shift of the reference wages („normal wage“) (Skott 2005, Stockhammer 2008)

Capital stock: imperfect substitution Capital stock: increased K (for given Y) reduces price setting

power of firms (Rowthorn 1979, 1995)Profit claims / mark up depends on (long-term) interest rate

(Hein 2008)

11

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Review of the empirical literature

Large mainstream literature on LMI and unemployment (Nickell 1997, Blanchard & Wolfers 2000 (interaction of

LMI and macroshocks), IMF 2003, Nickell et al 2006) Two principal Keynesian criticisms:

LMI explanation does not actually work empirically (Howell et al 2007), Baccaro and Rei (2007)

Capital accumulation matters (Rowthorn 1995, 1999, Stockhammer 2004, Palacio-Vera et al 2006, Arestis et al 2007)

Demand (and hysteresis) Limited substitutability (Rowthorn 1999)

Usually not capital accu and LMI in the same study Exceptions: Stockhammer 2004, Arestis et al 2007 But: time-series = only limited LMI set, small range of

countries

Overview selected empirical studies

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Classification of the Literature

Econometric approach LMI controlled for Macro shocks controlled for

TS Dyn.P Sta.P None some many none some K

Nickell 1997 X X X

Blanchard & Wolfers 2000 X X X

Bassanini & Duval 2006 X X X

Baccaro & Rei 2007 X X X X

Stockhammer 2004 X X X

Palacio-Vera et al 2006 X X X X

Arestis et al 2007 X X X

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This paper

Medium run unemployment (UMR)

Actual Unemployment (u)

Δp

LMI

Capital accumulation

(ΔK)

Interest rates (iCB)

Macroec.shocks

NAIRU (UN)

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Econometric Model & Data

uNAIRU = f(LMI, MS, K) panel least squares regression DATA

Bassanini & Duval 1982-2003 most up-to-date OECD dataset Basis of OECD Empl Outlook 2006

Baker, Glyn, Howell, Schmitt 1960-99 Updated and revised version of Nickell & Nunziata LMI-DB

u, K, CPI: EU AMECO Capital stock or investment?

20 Countries (all Western OECD and JP, without LU and GR)

All data transformed into non-overlapping 5-yr-avgs (Blanchard & Wolfers 2000, Baccaro & Rei 2007)

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Regression results (BD 83-03 dataset)

UB 0.01 0.58 0.02 1.06 0.02 0.75 -0.03 -1.00BD -1.09 -0.82 -0.03 -0.02 -1.08 -0.83 -2.35 -2.21 **EPL -0.72 -1.05 -0.63 -1.05 -0.77 -1.12 -0.79 -1.20UD 0.13 4.01 *** 0.09 2.25 ** 0.13 4.14 *** 0.09 3.02 ***COORD -0.77 -1.09 -1.25 -2.78 ** -0.97 -1.35 -0.63 -0.71CBC -0.04 -4.16 *** -0.03 -2.76 *** -0.04 -4.32 *** -0.05 -3.89 ***TW 0.08 1.18 0.10 1.61 0.08 1.27 0.04 0.73PMR 0.39 0.94 -0.13 -0.41 0.41 1.00 0.66 1.79INT 0.54 3.02 *** 0.55 4.77 *** 0.55 2.99 *** 0.22 1.62 *TOTS 0.14 2.27 ** 0.06 1.30 0.13 2.27 ** 0.02 0.45LDS 0.11 1.46 0.12 1.85 * 0.11 1.58 0.07 1.00TFPS 0.96 0.10 6.06 0.65 0.28 0.02 0.09 1.59ACCU -0.87 -2.61 ** -0.92 -3.31 *** -0.87 -2.61 ** -1.69 -7.03 ***∆INFL 0.14 0.56

R2 (adj.) 0.92 0.99 0.92 0.72n 93 93 93 73DW 2.18 2.16 2.22 1.74

LMI + MS + ACCU(in differences)

6LMI + MS + ACCU(no period effects)

Dependent variable: U; panel least squares; cross section and period fixed effects; White period standard errors & covariance (d.f. corrected); no weights (except variant 4: cross section weights). *,**,*** denote significance at the 10, 5, and 1% level, respectively.

5LMI + MS + ACCU

(incl. ∆INFL)LMI + MS + ACCU

43

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Regression results based on Baker et al dataset (1960-99)

UB -2.64 -1.00 -1.57 -1.07 -2.62 -1.00 -1.19 -0.70BD -1.63 -0.90 -0.33 -0.33 -1.65 -0.91 -1.77 -1.37EPL -1.09 -0.73 -0.55 -0.50 -1.06 -0.71 -2.05 -3.32UD 6.02 1.54 -0.93 -1.45 -0.93 -1.41 5.78 3.01 ***COORD -0.94 -1.42 2.78 1.27 6.39 1.62 -0.14 -0.35TW 3.14 0.43 11.51 3.51 *** 2.77 0.38 2.36 1.34INT 0.25 3.10 ** 0.28 3.99 *** 0.23 2.80 ** 0.16 2.90 ***TOTS -0.25 -0.73 -0.32 -1.06 -0.28 -0.83 -0.14 -0.42ACCU -0.59 -1.51 -1.05 -4.66 *** -0.55 -1.39 -0.93 -3.30 ***∆INFL -0.21 -1.05

R2 (adj.) 0.81 0.84 0.81 0.48n 149 149 149 129DW 0.92 1.13 0.92 1.68

Table 2: Unemployment effects of Institutions, macro shocks, and capital accumulation

6LMI + MS + ACCU

(in differences)

Baker et al dataset (1960-1999)

(incl. ∆INFL)LMI + MS + ACCU

(no period effects)

4LMI + MS + ACCU

3LMI + MS + ACCU

5

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Findings I

LMI do play a role, but a minor one Few are consistently statistically significant, many display perverse

signs Only Union Density (UD) statistically significant (and with the expected

sign) across data sets and different specifications In line with Baccaro and Rei (2007), Howell et al (2005)

Demand shocks do play an important role Strong (and significant) effect of real interest rates

+1%-pt. real interest rate → +0.5%-pts. unemployment rate

Strong (and significant) effect of ACCU +1% ACCU → -0.9%-pts. unemployment rate

Supply shocks play some (minor) role TOT, LD have effects, particularly in the short (BD) sample

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Interactions among LMI

Interactions have been popular in the recent (mainstream) literature

e.g. Blanchard and Wolfers 2000, IMF 2003, Nickell et al 2005, Bassanini and Duval 2006

... but have been reported rather selectively, i.e. the ones that were found statistically significant

Theoretical background for interactions weak Many possible interactions (we report 60) Some (11/60) are statistically significant About half of them with counterintuitive signs Overall: unconvincing

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Interactions among LMI

Bassanini and Duval dataset (1982-2003)BD EPL UD COORD CBC TW PMR INT TOTS LDS TFPS

UB -0.01 -0.04 0.00 0.02 -0.08 0.00 -0.01 0.00 -0.16 -0.04 -0.15-0.22 -3.33 -1.23 0.30 -1.94 -0.19 -0.72 0.20 -1.23 -0.13 -0.34

BD 1.74 -0.24 -1.37 -8.88 0.40 -0.94 -1.26 -6.69 -0.44 19.621.30 -2.67 -0.56 -1.25 2.55 -0.87 -3.57 -0.41 -0.01 0.61

EPL -0.01 1.38 -2.60 -0.03 -0.20 -0.14 -0.98 -0.77 9.05-1.13 2.46 -1.45 -0.83 -1.14 -1.27 -0.29 -0.16 1.01

UD -0.03 -0.06 0.00 -0.01 -0.01 -0.06 0.41 -0.56-0.38 -0.91 0.13 -1.98 -1.83 -0.55 1.61 -1.42

COORD -3.19 0.10 0.06 -0.08 -1.10 -8.08 2.54-0.76 1.51 0.16 -0.31 -0.18 -0.86 0.13

CBC 0.28 -0.58 -0.49 -1.51 15.16 14.972.68 -1.72 -2.35 -0.23 1.73 0.96

TW -0.02 0.01 -0.30 1.23 1.39-1.23 0.39 -0.78 3.12 1.70

PMR -0.10 -1.00 -5.29 1.04-1.05 -0.37 -2.52 0.09

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-1

-0.5

0

0.5

1

1.5

1960-1965 1965-1970 1970-1975 1975-1980 1980-1985 1985-1990 1990-1995 1995-2000

UD

TOTS

RIR

ACCU

Contributions to unemployment in %pts relative to 1960-64 for ‚mean country‘ (BGHS dataset)

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Contributions across countries (in %-pts.) from 1990-94 to 2000-03 (BD 1982-2003)

-10

-8

-6

-4

-2

0

2

4

AT AU BE CA CH DE DK ES FI FR IE IT JP NL NO NZ PT SE UK US

ACCU

TOTS

RIR

CBC

UD

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Findings II

Economic relevance over time Early 70s: INT and ACCU lower

unemployment, from 80s on strong positive effects: high real interest rates and diminished ACCU raise unemployment

70s and 80s: UD contributes to unemployment, in 90s the effect is negative

From mid 80s on, TW contributes to unemployment (however typically insignificant in our study, as opposed to B&D 2006)

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Measures of investment and capital

Is capital accumulation a demand-side or a supply-side variable?

Investment instead of ∆K/K: demand shocks Perform very similar econometrically (log real gross fixed capital

formation indeed even works somewhat better) K (stock): supply side variable

Post Keynesian ‚capital shortage‘ argument: periods of insufficient ACCU leave capital stock ill-suited to accommodate high employment growth in the subsequent recoveries

There is some evidence that it has negative effect on unemployment, but not entirely robust(clearer in BD82-03 than in BGHS60-99)

We find evidence for both channels weak evidence that demand-side effects of capital accumulation

are stronger (more robust) than supply-side effects

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Capital accumulation: demand effects and supply effects (B&D dataset)

Table 5: Inclusion of (log) capital stock in the regressions Bassanini and Duval dataset (1982-2003)

1 2 3 4 5 ACCU INV K K + ACCU K + INV UB 0.01 0.58 0.01 0.36 0.01 1.05 0.01 0.46 0.01 0.36 BD -1.09 -0.82 -0.40 -0.43 -1.28 -1.09 -1.21 -0.78 -0.44 -0.44 EPL -0.72 -1.05 -1.18 -2.63 ** -1.23 -2.19 ** -1.04 -1.87 * -1.21 -2.53 ** UD 0.13 4.01 *** 0.08 2.63 ** 0.11 4.39 *** 0.10 3.2 *** 0.08 2.52 ** COORD -0.77 -1.09 -1.63 -2.85 *** -0.77 -1.44 -1.06 -1.57 -1.63 -2.88 *** CBC -4.18 -4.16 *** -2.77 -3.31 *** -2.94 -3.03 *** -3.14 -3 *** -2.70 -3.31 *** TW 0.08 1.18 0.05 0.91 0.18 3.75 *** 0.11 2.16 ** 0.06 0.93 PMR 0.39 0.94 0.90 3.04 *** 0.54 1.28 0.69 2.1 ** 0.92 2.93 *** INT 0.54 3.02 *** 0.28 1.88 * 0.67 4.86 *** 0.48 3.37 *** 0.29 1.92 * TOTS 0.14 2.27 ** 0.08 2.01 ** 0.20 4.98 *** 0.13 2.34 ** 0.09 2.1 ** LDS 0.11 1.46 0.09 1.9 * 0.17 3 *** 0.13 2.18 ** 0.09 1.86 * TFPS 0.01 0.1 0.08 0.83 -0.05 -0.44 0.03 0.31 0.08 0.8 ACCU -0.87 -2.61 ** -0.83 -3.03 *** INV -0.23 -5.48 *** -0.23 -4.26 *** K -0.09 -4.56 *** -0.08 -4.65 *** -0.01 -0.43 r2 (adj.) 0.92 0.94 0.92 0.93 0.94 n 93 93 93 93 93 DW 2.18 2.15 2.81 2.35 2.18

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Capital accumulation: demand effects and supply effects (BGHS data set)

Table A3: Inclusion of (log) capital stock in the regressions BGHS dataset (1960-1999)

1 2 3 4 5

ACCU INV K K + ACCU K + INV

UB -1.19 -0.70 -1.44 -0.93 -0.64 -0.37 -1.15 -0.62 -1.48 -0.94

BD -1.77 -1.37 -0.98 -0.77 -0.88 -0.50 -1.17 -0.82 -0.98 -0.78

EPL -2.05 -3.32 *** -2.56 -3.30 *** -2.10 -2.19 ** -2.32 -3.53 *** -2.59 -3.34 ***

UD 5.78 3.01 *** 3.91 1.97 * 8.86 2.71 *** 5.29 2.56 ** 4.10 1.97 *

COORD -0.14 -0.35 -0.58 -1.34 -0.50 -1.11 -0.55 -1.24 -0.57 -1.30 *

TW 2.36 1.34 4.76 2.02 ** 2.94 0.71 4.18 1.88 * 4.57 2.08 **

INT 0.16 2.90 ** 0.08 1.41 0.21 2.25 ** 0.13 2.35 ** 0.07 1.34

TOTS -0.14 -0.42 -0.37 -1.02 -0.44 -0.96 -0.43 -0.99 -0.35 -0.92

ACCU -0.93 -3.30 *** 0.00 0.00 -1.00 -3.23 *** 0.00

INV -0.19 -3.98 *** 0.00 0.00 -0.20 -4.22 ***

KSTOCK -0.06 -1.91 * -0.05 -1.66 * 0.02 1.01

r2 (adj.) 0.48 0.56 0.34 0.50 0.55

n 129 129 129 129 129

DW 1.68 1.56 1.97 1.65 1.59

Dependent variable: d(U); panel least squares; period fixed effects; White period standard errors & covariance (d.f. corrected); no weights; *,**,*** denote significance at the 10, 5, and 1% level, respectively.

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Summary / conclusion

The degree of capital accumulation has a strong impact on unemployment in the medium run

Real interest rate shocks play a significant role even when ACCU is simultaneously controlled for

The effects of LMI are relatively modest and unrobust Only Union Density delivers consistent (positive) effect Counteracted by COORD (or CBC) Some role for TW; ‚perverse‘ results for EPL, UB

Investment (flow) seems to play a larger role (as a demand shock) than the capital stock (as a supply variable)

Policy conclusions: focus on LMI as explanations for persistent unemployment

is misguided – labour market reforms will not cure unemployment

Encourage investment and capital accumulation

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Thank you for your attention.

30

Standard story: high u and high W/P

WBC1(LMI)

PS

1-u, e

W/P WBC2(inflex LMI)

A

B

eN = 1-NAIRU

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Stylized facts: high u and low W/P

WBC

PS

1-u, e

W/P

A

B

C