Economia Politica. Rivista di teoria e analisi Economia Politica. Rivista di teoria e analisi
Non-Technical Summary
Textbooks of the theory of economic growth explain, following to Solow (1956), that economic growth tends to be at the "natural" rate, given by productivity growth and population growth, but they usually assume full employment. Macroeconomic textbooks explain, following to Friedman (1968), that unemployment tends to be at the "natural" rate, given by real economic conditions, without studying economic growth. Hence, the traditional theory implies that economic growth and unemployment are independent, i.e. dichotomic. However, the paper preliminarily shows that if the curve of labour supply in the Solow model is no longer rigid w.r.t. wages, then natural growth determines a reduction in unemployment. This awkward result is called the "Solow problem".
Recently the dichotomy has been re-established by employing the hypothesis of the trade union, so that economic growth does not affect unemployment even if the pseudo-supply is elastic (Layard - Nickell - Jackman, 1991), and shocks in the pseudo-supply do not affect growth (Gordon, 1995).
The main purpose of the paper is to show that various attempts are emerging in the literature in order to drop this dichotomy, although assuming the traditional hypothesis of rational and maximising agents. Consequently, labour policies can have permanent effects on economic growth, and growth-oriented policies can have permanent effects on unemployment.
Since the attempts greatly differ in their hypotheses, methods, and purposes, this survey employs a homogenous graphical analysis to better evaluate the differences and the novelties.
A first attempt identifies a necessary requirement for dichotomy in the particular production function usually assumed, i.e. of the Cobb-Douglas type. Rowthorn (1996) shows, by means of a CES function, that if the elasticity of substitution between capital and labour is less than one, instead, a steady state growth of productivity implies increasing unemployment. Then, the Solow problem reappears.
Search cost in the labour market is another hypothesis which allows some authors to study the relationship between steady state growth rates and constant unemployment rates. Pissarides (1990) finds a negative relationship through a capitalisation effect of discounted profits, Aghion - Howitt (1994) finds a positive relationship by emphasising the job destruction of productivity growth.
The new theory of endogenous growth provides the hypothesis of constant returns to accumulable factors in order to explain changes in growth rates after shocks in the (pseudo-) supply of labour. According to Daveri - Tabellini (1997) and to Bean - Pissarides (1993) the growth rate reduces, while according to Aghion - Howitt (1994) it rises after a positive shock.
Stadler (1990) studies a different kind of shock: the monetary one. He obtains a real effect in both growth and unemployment, provided that a sufficient degree of externality in production and a sticky money wage are assumed. The method adopted is not simply that of comparative steady state rates of growth, but that of cyclical adjustments.
A final key hypothesis explored to drop the dichotomy is the strategic complementarity between households' decisions on human capital accumulation, and firms' decisions on labour employment. The underlying necessary assumption is that job search costs prevail, thus implying anonymity in the partnership between workers and jobs. A negative and cumulative relationship between growth and unemployment emerges, with the possibility of multiple steady state solutions.
The conclusions of the paper are the following. First, the solution of the "Solow problem", i.e. equal growth in both curves of demand and (pseudo-)supply of labour, which allows the dichotomy to survive, requires particular hypotheses. Second, the relationship between steady state rates of growth and constant rates of unemployment can be negative or positive depending on specific key-assumptions, which refer to complementarities, search costs, adjustment costs, externalities. Third, the concept of "natural" rate of unemployment loses theoretical ground, since its existence, stability and uniqueness cannot be guaranteed with steady state growth, and since it can no longer be used to distinguish between real and monetary aspects. Fourth, some results can be thought of having Classical, Schumpeterian or Keynesian flavour.
Despite the variety of attempts to drop the dichotomy, this literature is still in its infancy, particularly lacking in its dealing with two problems: the interplay between cycle and trend, and the connected role of money.
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