DP723 Unemployment, Consumption and Growth
In this paper we highlight certain links between unemployment, savings and growth. Using a standard overlapping generations framework, modified to incorporate matching frictions in the labour market and a technology capable of yielding unbounded endogenous growth, we show that the cross-country bivariate correlation between unemployment and growth can be either positive or negative depending on the source of the differences in economic structures across countries. Amongst other results we note an `anti-Kaldorian' property whereby an increase in the relative bargaining strength of workers which tends to reduce employment (and hence also the volume of savings), may nevertheless increase growth because the associated redistribution towards those who save (the young) produces an increase in the total volume of savings overall. We also present a two-sector variant of the model in which there is imperfect (Cournot) competition in consumption goods markets. A reduction in the propensity to save leads to an expansion in the market size for consumption goods, an increase in competition as new firms enter, and a fall in the relative price of consumption goods. This tends to expand employment. If entry costs into consumption goods production are sufficiently large this expansion in employment can be big enough to produce an increase in the total volume of savings even though the propensity to save has itself decreased. This `Keynesian' result is in marked contrast to more `Classical' results that are obtained when the same experiment is conducted in our earlier model.