We model of demand-led growth with endogenous adjustment of labour supply and productivity, an approach that reconciles Harrod’s warranted rate of demand growth with supply. The model delivers a range of growth paths and unemployment rates rather than a single ‘natural rate’. Theoretically, the steady-state growth path may be dynamically stable or unstable, but empirical calibration favours stability. We show analytically that if demand dynamics are stable, supply will converge to the demand-determined growth path. While a minimum unemployment rate ultimately imposes a supply constraint on growth, empirical results show that a wide range of growth rates are feasible across different demand regimes. The results explain how economies can become trapped with low growth due to weak demand or fiscal austerity and suggest policy responses to stagnant demand.

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The paper analyzes unemployment in a medium-run growth model, where aggregate demand and supply interact. On one hand, autonomous demand drives the dynamics of the system, while heterogeneity in the consumption function, due to the presence of unemployment, strengthens the links with supply aspects. On the other hand, both the rate of growth of labor productivity and labor supply are endogenous. Two major results are obtained. First, unemployment allows the reconciliation between aggregate demand and supply. The second is that unemployment remains bounded and this means that the interaction between aggregate demand and supply thwarts instability. These results are in keeping with those obtained by means of a bottom-up approach, typical of agent based models (ABM). Possible explanations and implications of this convergence are put forward. the study of a nonlinear system where both aggregate demand and supply are endogenous and generate a bounded unemployment, followed by a methodological effort direct to identify possible lines of convergence with the AMB approach. This is a by-product of the presence of heterogeneity in our model.

Instability, Nonlinearities, Fluctuations, Rates of interest, Heterogeneous expectations, E32, E12, E43,