This paper criticizes the current enthusiasm for labour market policies as the main route to employment creation in OECD countries. Such policies are normally seen as a means of encouraging more employment on existing capital stock. This approach is one-sided and downplays the equally important task of increasing productive capacity. With more investment in productive capacity, conventional labour market policies for increasing employment would be more effective and some might be unnecessary. The paper analyses the role of capital stock within the framework of a simple NAIRU model based on previous work by the author. It also presents some empirical evidence.
