Underinvestment and Unemployment: The Double Hazard in the Euro Area
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Underinvestment and Unemployment: The Double Hazard in the Euro Area
Christodoulakis, Nicos | Axioglou, Christos
Applied Economics Quarterly, Vol. 63(2017), Iss. 1 : pp. 49–80 | First published online: February 23, 2018
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Nicos Christodoulakis, Athens University of Economics and Business; Hellenic Observatory, London School of Economics. Address for correspondence: 76, Patission Street, Athens, Greece, 10434.
Christos Axioglou, Fiscal Council, Ministry of Finance, Greece.
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Abstract
An alarming legacy of the austerity programs in the euro area is the vast disinvestment that has taken place over the recent years, and especially so in the peripheral economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but also undermines the prospects of a gradual reduction of unemployment and risks further imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model with labour market imperfections, the paper shows that unemployment is a function of capital investment under either CES or Cobb-Douglas production functions. A cross-section estimate for the euro area economies confirms the theoretical findings.