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Cambridge Journal of Economics Advance Access originally published online on August 5, 2008
Cambridge Journal of Economics 2009 33(1):51-77; doi:10.1093/cje/ben029
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© The Author 2008. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

(How) do flexible labour markets really work? The role of profitability in influencing unemployment

Paul Lewis*

* University of Birmingham, UK

Address for correspondence: Department of Political Science and International Studies, University of Birmingham, Edgbaston, Birmingham B15 2TT, UK; email: paul.lewis{at}dunelm.org.uk

This paper assesses the theoretical justifications available for policies of flexible labour markets (FLMs) in reducing the level of unemployment in developed economies. It empirically assesses the OECD's rationalisation of policy linking profitability to investment and job creation in four country cases. New capital investment is found to be significant for unemployment in all cases but it is not found to be a consequence of the mechanistic achievement of ‘normal’ profits. Without an empirically supported mechanism for how FLMs reduce unemployment, the policy is open to the accusation of being no more than a political tool for altering distribution, without concern for the wider socio-economic consequences.

Key Words: Unemployment • Flexible labour markets • Profitability • Capital investment • inequality

JEL classifications: E22, E23, E24

Manuscript received March 27, 2007; final version received May 6, 2008.


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