Equation (26) shows the transitional dynamics for the capital intensity; it increases
if

Thus, if a capital intensity is realized lying below the balanced capital accumula-
tion function, this capital intensity is too small to generate the equilibrium capital
accumulation in labor efficiency units. The realized capital intensity has to increase
in order to reach the equilibrium capital intensity and vice versa.

Due to this analysis, the transitional dynamics shown in Figure 4 are implied.
To achieve the long-run steady-state the dynamic system not only has to be in the
areas of I or III, it also has to be on the stable saddle path s and the starting
variables V(0), U(0), E(0) and K(0) must have values such that they are already on
the saddle path s in t = 0.

5 Economics of the Steady-State

For analyzing the effect of technical progress on long-term unemployment, its influ-
ence on the efficient factor allocation function, on the balanced capital accumulation
function and on the equilibrium level of long-term unemployment for economies with
a high respectively a low equilibrium level of capital intensity is derived in the fol-
lowing.

An increase in the rate of technical progress induces a change in the efficient
factor allocation function and shifts the function downwards. Therefore, an inverse

relation between efficient factor allocation and the growth rate of technical progress
exists,¹⁹ i.e.

>o

For given capital intensity the increase in the growth rate of technical progress
shifts the efficient factor allocation function downwards and reduced labor market
tightness and increased unemployment is implied.

¹⁹For the derivation of the inverse relation see appendix.

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