Evidence for the OECD countries show that the “great ratios”, such as the unemployment rate, factor shares, Tobin's q, and the investment-capital ratio, fluctuate significantly on medium-term frequencies of 8–40 years duration. To explain these medium-term fluctuations, we establish a macro-dynamic model where the q-theory of investment is combined with sluggish real-wage adjustment in the labour market. In this framework, responses to shocks show persistence and amplification. A high degree of real-wage rigidity combined with a low elasticity of factor substitution leads to damped internal oscillations and hump-shaped impulse-response functions.
- Elasticity of factor substitution
- Endogenous oscillations
- Medium-term cycles
- Real-wage Phillips curve
- Tobin's q