Capital shortages and asymmetries in UK unemployment

Abstract

The paper is concerned with the determination of wages and unemployment in the UK. Particular emphasis is put on the asymmetric effect of capital stock on employment. It is argued that capital scrapping in response to the two oil price shocks, combined with subsequent sluggish growth in capital, may be responsible for the rise of the NAIRU and the persistence of unemployment. Furthermor, since during the recovery investment responded slowly, capital shortage may to some extent be responsible for the rise in long-term unemployment. The theoretical model also suggests that workers are concerned about their relative position in the wage hierarchy. Consequently, nominal wages adjust asymmetrically in response to changes in the NAIRU. The empirical analysis is concerned with testing the above hypotheses, by using quarterly data for the UK from 1966 until 1994. We use cointegration analysis for the determination of wages, unemployment and the ratio of the long-term unemployed. An asymmetric error correction model tests for different speeds of adjustment in response to changes in the NAIRU.