Unemployment and Economic Growth Cycles

The purpose of this paper is to study the dynamic interaction between economic growth and unemployment in a general model of economic growth. Labour market disequilibrium is introduced through a non-market real wage clearing modeled by a non linear Phillips Curve. We show that unemployment rate and per capita income dynamics fluctuate along cycles of different periods, and they may even have aperiodic paths. Labour market characteristics are the endogenous source of instability. In particular, as the rigidity of the labour market increases, the possibility of irregular behaviour increases as well. Besides cyclical behaviour, the dynamic analysis points to a positive income growth trend sustained by knowledge accumulation; however, there are periods where per capita income decreases. Moreover, in the same line as wage bargaining models (Layard and Nickell, 1985, 1986), we get the result that the higher workers' bargaining power, the lower both employment rate and per capita production. The paper aims to complement the literature in understanding the origin and nature of fluctuations in economic growth models.