Search

This paper introduces a standard neoclassical production function in an equilibrium search model of the labour market, in order to analyse the effects that changes in the (exogenous) rental rate of capital have on the unemployment rate. When the number of firms is kept fixed, an increase in the rental rate affects unemployment only through its impact on selectivity, with the direction of the change depending on the size of the worker's unemployment benefits relative to the firm's search costs. Regardless of the behavior of selectivity, when the number of firms is determined endogenously, an increase in the rental rate always increases unemployment through a process of job destruction. [ABSTRACT FROM AUTHOR]