Demand-Supply Interactions and Unemployment Dynamics: Can there be Path Dependency ? The Case of Belgium, 1955-1994

The proportion of capacity-constrained firms in European economies remains today fairly small, which suggests that capacity shortages cannot be the direct and single cause of unemployment persistence. Inferring from this observation that low investment rates play no role in explaining the persistence of high unemployment rates may however fail to take into account the relationship between demand expectations, capital accumulation and real rigidities. The objective of this paper, is to show how a continuum of excess-supply equilibria can be obtained, in models with real rigidities, similar to those traditionally used to analyse the determinants of equilibrium unemployment (the NAIRU), provided one takes explicitly into account the effect of a ``capital gap" on wage formation, and the relationship between capital accumulation and demand expectations. Such a persistence mechanism might contribute to explain why current unemployment rates seem to depend so much on past history, and why there is no simple explanation that applies equally well to all European countries. The results obtained from an empirical analysis of Belgian post-war data are compatible with such a scenario.