Factors Behind Unemployment Rate Answers Assessment Answer



Rising unemployment is a severe threat to an economy. To resolve the problem, it is necessary to identify the factors responsible for it. In this paper, three scholar articles have been analysed. The selected articles are “Capital accumulation, labour market institutions and unemployment in the medium run” by Stockhammer and Klar (2011); “Capital Formation And Unemployment” by Rowthorn (1995) and “The Role of Shocks and Institutions in the Rise of European Unemployment: the Aggregate Evidence” by Blanchard and Wolfers (2000). These articles tried to identify the reasons behind growing unemployment in the Europe including OECD countries. At first, the major findings and arguments of the authors in respective articles have been discussed. Further, this paper has mentioned how the articles are related to each other. At the end, policy recommendations are discussed that can help to deal the problem of unemployment, based on the given articles.

Factors responsible for rising unemployment

Stockhammer and Klar (2011) have focused on how unemployment is determined by the labor market institutions. However, empirical studies showed that capital accumulation has significant impact on unemployment. It has been claimed that, there is no proof that less labor market rigidity can reduce the level of unemployment. Moreover, non-accelerating inflation rate of unemployment (NAIRU) could not be declined by removing labor market rigidities in OECD countries. Keynesian views states that there is inverse relationship between capital accumulation and unemployment (Stockhammer and Klar 2011, p. 438). The article by Stockhammer and  Klar (2011) emphasized on role of capital accumulation’s role in explaining unemployment. They argued that benefit duration and union density are statistically significant. Bargaining system with a higher degree of employees covered by collective bargaining features lower unemployment. These two variables have positive association. The variable collective bargaining coverage is negatively correlated to union density. Moreover, employment protection legislation is positively related but insignificant. The author has also found that an increase in capital accumulation by 1% reduces rate of unemployment by 0.87% point with time effect and by 0.92% point without time effect (Stockhammer and Klar 2011, p.449). They argued that inflation rate has insignificant impact on unemployment rate. This article has discussed interaction between labor market institutions and macroeconomic shocks as well as interactions among themselves. Some interactions are reinforcing and some are perverse. Higher interest rate can reduce the unemployment if benefit duration in lengthy and employment protection reduces unemployment if unemployment is low.

Rowthorn (1995, p.27) has examined the relationship between employment and the capital stock. He argued that low investment rate in Western Europe was responsible for increasing unemployment in the region. Measures like education, training and labor market reform can be effective in reducing unemployment only if the sufficient investment is made in order to improve productive capacity (Rowthorn 1995, p.27). Moreover, he argued that employment could be generated only through increasing capital stock, instead of generating it on existing capital stock. Evidence has found that short-term oil shock led to increase in non-accelerating inflation rate of unemployment due to loss of capital stock (Rowthorn 1995, p.27). According to his findings, growth rate of labor productivity permits the market to operate with less unemployment; it provides a way through which investment can decrease unemployment in the medium term. Rowthorn (1995, p.35) has also focused in explaining why investment has fallen in OECD countries. He argued that long-term real interest rate should be reduced and there is no short-term constraint on expansion arising from capacity shortage. It is argued that quality of labor supply should be improved. Labor market policies encourage job creation on existing capital stock, but the author argued that these policies actually form capital, which in turn will raise the employment rate in the economy.

Blanchard and Wolfers (2000, p.C1) discussed with evidence how economic shocks and institutions increase the unemployment in Europe. Fall in total factor productivity causes rise in equilibrium unemployment rate. However, this is not permanent, as once expectations is adjusted unemployment will tend to fall. This fall in TFP cannot explain the rising trend of unemployment over twenty years, in Europe. The authors (2000, p.C6) have found that real interest rate was negative in the second half to 1970s and then again large during 1980s and 1990s. They argued that these changes will affect the capital accumulation at a given wage rate and demand for labor will be shifted. However, these real interest rate fluctuations have little impact on long run unemployment. When the interest rate is very low, it delays the unemployment rate and due to high rate of real interest, unemployment rises. Blanchard and Wolfers (2000, p.C6) have also mentioned that labor share fell strikingly during 1980s, after being high in 1970s. Due to fall in TFP, demand for labor falls and unemployment increases. These authors have also stated that labor market institutions increase unemployment and change the nature of unemployment. However, some labor market institutions have effect neither on rate nor on nature. This article has also mentioned that collective bargaining; higher minimum wage raises the unemployment.

The three given articles focus on explaining the factors that lead to unemployment in the Europe. The articles by Stockhammer and Klar (2011) and Rowthron (1995) identified capital accumulation as major factor behind the rising unemployment. Both articles argued the similar thing that states that for a reduction in unemployment, capital accumulation is required through investment. Another article Blanchard and Wolfers (2000) mentioned the role of labor market institutions in explaining the rate of unemployment, as also stated by Stockhammer and Klar (2011). Moreover, this article emphasis on two factors which explain short-term rise in unemployment, such as TFP and real interest rate (Blanchard and Wolfers 2000). There is a difference between the articles by Blanchard and Wolfers (2000) and Stockhammer and Klar (2011). The first one identified role of labor market institutions as significant, however, the later one mentioned its role but stated that the impact is insignificant. The factors identified are mostly same in all  given articles; the differences lie in the approach and other factors identified in this regard.


From the above discussion, it has been found that unemployment cannot be reduced after a certain level as that may lead to a rise in the inflation rate. According to the arguments of these three articles, policies can be recommended to reduce unemployment from an economy. It has been argued by the authors that with the help of capital accumulation, the unemployment can be reduced. Hence, the government or policy makers should target to increase investment in the economy for more capital accumulation so that productivity increases and labor demand rises. The labor market institutions must be controlled as some of its measures like unemployment benefits, lead to rise in unemployment. Rowthron suggested in his article, to stress on labor-market policies along with stimulation of capital stock. By controlling real interest rate, the impact of unemployment can be changed. It is recommended that the policy should be focused on good markets rather than labor market, in order to reduce unemployment. The policy prescriptions should be modified in a way that it does not discourage the labor force participation and reduce demand for labor; and the most effective way is to stimulate capital formation.


Blanchard, O. and Wolfers, J. (2000). The Role of Shocks and Institutions in the Rise of European Unemployment: the Aggregate Evidence. Economic Journal, 110(462), pp.1-33.

Rowthorn, R. (1995). Capital Formation And Unemployment. Oxford Review of Economic Policy, 11(1), pp.26-39.

Stockhammer, E. and Klar, E. (2011). Capital accumulation, labour market institutions and unemployment in the medium run. Cambridge Journal of Economics, 35, pp.437-457.

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