UNDERINVESTMENT AND UNEMPLOYMENT:
THE DOUBLE HAZARD IN THE EURO AREA
Athens University of Economics and Business, Hellenic Observatory, London School of Economics
Ministry of Finance, Greece
An alarming legacy of the austerity programs in the euro area is the vast disinvestment that has taken place over the recent years, and especially so in the peripheral economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but also undermines the prospects of a gradual reduction of unemployment and risks further imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model with labour market imperfections, the paper shows that unemployment is a function of capital investment under either CES or Cobb-Douglas production functions. A cross-section estimate for the euro area economies confirms the theoretical findings.
Keywords: euro area, investment, unemployment, capital-labour substitution, production function
JEL classification: E22, E24
Acknowledgement: This research was financed by the Bank of Greece. The authors are thankful to Ioanna Pantelaiou for research assistance and seminar participants in the Bank of Greece, the Centre of Economic Planning and the Demokrition University of Thrace for valuable comments on an earlier version. The usual disclaimer applies.
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