Investment and the long swings of unemployment

• Main Authors: HOON, Hian Teck, MARGARITA, Katsimi, ZOEGA, Gylfi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Long swings of unemployment; investment; current account; Great Recession; Finance; Labor Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2216; https://ink.library.smu.edu.sg/context/soe_research/article/3215/viewcontent/BWPEF1810.pdf
• Institution: Singapore Management University

We estimate the relationship between investment and unemployment over the time period 1960-2015 in 20 OECD countries. While neoclassical growth theory typically assumes full employment – with no effect of investment on unemployment – we find that over our sample period covering more than five decades, a statistically significant negative relationship does exist: when investment fell, unemployment increased. When the time period is broken down into two sub-periods to take account of the Great Recession, we find that the estimated coefficient of investment is slightly smaller when the period 2001-2015 is added to the 1960-2000 period. We also find a positive effect of the current account surplus on unemployment that very likely works through investment. A non-monetary model shows how an increase in policy uncertainty that sharply contracts investment and raises unemployment can lead to an increase in current account surplus.