A Growth Model with Unemployment

TL;DR

This paper introduces a modified growth model that incorporates Keynesian ideas, linking exogenous investment changes to employment and unemployment, and validates it with U.S. economic data from 1947 to 2014.

Contribution

It presents a novel growth model integrating unemployment dynamics driven by exogenous investment, bridging long-term trends and short-term fluctuations.

Findings

Inverse relationship between capital growth and unemployment changes confirmed

Model fits unemployment fluctuations reasonably well

Explains both long-term trends and short-term fluctuations

Abstract

A standard growth model is modified in a straightforward way to incorporate what Keynes (1936) suggests in the "essence" of his general theory. The theoretical essence is the idea that exogenous changes in investment cause changes in employment and unemployment. We implement this idea by assuming the path for capital growth rate is exogenous in the growth model. The result is a growth model that can explain both long term trends and fluctuations around the trend. The modified growth model was tested using the U.S. economic data from 1947 to 2014. The hypothesized inverse relationship between the capital growth and changes in unemployment was confirmed, and the structurally estimated model fits fluctuations in unemployment reasonably well.