Unemployment persistence and loss of productive capacity: A Keynesian approach
Abstract Empirical evidence suggests that the European unemployment problem is somehow connected with a capital shortage. The paper introduces a Keynesian model to deal with this issue. In this model the rate of capacity utilization plays a central role in two simultaneously operating mechanisms thus exhibiting hysteresis: price adjustment and capital accumulation. The implications for employment and unemployment are discussed. It is demonstrated that equilibrium unemployment may be caused by adverse demand shocks.