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00.2 Program for the Study of Germany and Europe

Falling Labor Share and Rising Unemployment: Long-Run Consequences of Institutional Shocks?

2000 Rainer Fehn, Norbert Berhold and Eric Thode


The literature on unemployment has mostly focused on labor market issues while the impact of capital foonation is largely neglected Job-creation is often thought to be a matter of encouraging more employment on a given capital stock. In contrast, this paper explicitly deals with the long-run consequences of institutional shocks on capital foonation and employment. It is shown that the usual trade off between employment and wages disappears in the long run. In line with an appropriation model, the estimated values for the long-run elasticities of substitution between capital and labor for Germany and France are substantially greater than one.