Growth-Employment Relationship and Leijonhufvud's Corridor

• Published in: Recherches économiques de Louvain Vol. 80; no. 2; pp. 111 - 124 [1-22]
• Main Author: Le Page, Jean-Marie
• Format: Journal Article
• Language: English
• Published: De Boeck Université 01-01-2014
• Subjects: Quantitative Finance; unemployment theory; instability principle; Unemployment rate; economic dynamics; Leijonhufvud's corridor; hysteresis; growth employment relationship
• ISSN: 0770-4518; 1782-1495
• DOI: 10.3917/rel.802.0111

Since 2008, the euro area unemployment rate has increased constantly, while this economy’s GDP was the same at the end of 2012 as it was in 2008. The recent trend of aggregate economic activity in this area illustrates the risk that an economy leaves its stability corridor, in which it usually progresses in a cyclical way, to enter an area of turbulence. In this area, the automatic stabilizers have weak feedback forces. To examine this kind of situation in a theoretical framework, this paper presents a model that relies both on Leijonhufvud’s corridor and on Harrod’s instability principle. This model allows a threshold to be defined beyond which the economy runs the risk of entering a cumulative process of simultaneous declines in growth and employment. However, the existence of such a process requires unemployment to have a sufficiently direct effect on the growth in aggregate demand, as seems to be the case nowadays.