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

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3 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)

5 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 (U N ) Actual Unemployment (u) ΔpΔp LMI

8 Keynes‘ approach Demand (y) (goods markets) Actual Unemployment (u) ΔpΔpWS Capital accumulation (ΔK) Interest rates „animal spirits“

A modern Keynesian approach 9 Demand (y) (goods markets) NAIRU (U N ) Actual Unemployment (u) ΔpΔpWS LMI Capital accumulation (ΔK) Interest rates (i CB )

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

12 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

14 Classification of the Literature Econometric approachLMI controlled for Macro shocks controlled for TSDyn.PSta.PNonesomemanynonesomeK Nickell 1997 XXX Blanchard & Wolfers 2000 XXX Bassanini & Duval 2006 XXX Baccaro & Rei 2007 XXXX Stockhammer 2004 XXX Palacio-Vera et al 2006 XXXX Arestis et al 2007 XXX

15 This paper Medium run unemployment (U MR ) Actual Unemployment (u) ΔpΔp LMI Capital accumulation (ΔK) Interest rates (i CB ) Macroec. shocks NAIRU (U N )

16 Econometric Model & Data  u NAIRU = f(LMI, MS,  K)  panel least squares regression  DATA  Bassanini & Duval  most up-to-date OECD dataset  Basis of OECD Empl Outlook 2006  Baker, Glyn, Howell, Schmitt  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)

17 Regression results (BD dataset)

18 Regression results based on Baker et al dataset ( )

19 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

20 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

21 Interactions among LMI

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

23 Contributions across countries (in %-pts.) from to (BD )

24 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)

25 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

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

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

28 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

29 Thank you for your attention.

30 Standard story: high u and high W/P WBC 1 (LMI) PS 1-u, e W/P WBC 2 (inflex LMI) A B e N = 1-NAIRU

31 Stylized facts: high u and low W/P WBC PS 1-u, e W/P A B C