<p>This paper studies the macrodynamics between unemployment and capital accumulation in a developing economy. It presents a two-sector small open economy model in which labor and capital are gross complements, and wages are institutionally determined. The model yields an equilibrium unemployment rate bound up with the economy’s capital intensity and identifies channels through which capital formation reduces unemployment. Under constant returns to scale, the system admits a unique, locally stable steady state. Introducing capital-driven technological externalities in the formal sector generates non-monotonicities in the profit rate’s response to capital, yielding multiple steady states. Monetary policy affects the real exchange rate through interest-rate differentials and capital mobility. A phase-diagram analysis shows that interest-rate-induced overvaluations reduce tradable-sector profitability and can push the economy into a high-unemployment, low-capital trap. Empirically, we assess the quantitative implications of the model using quarterly data for Colombia (1994–2023) employing a threshold vector autoregression model with regime switching governed by real exchange rate misalignment. We find that capital accumulation is considerably more effective in reducing unemployment during periods of real exchange rate undervaluation. In contrast, overvaluation renders capital shocks largely ineffective. These findings suggest that monetary policy frameworks that systematically overvalue the real exchange rate may undermine employment goals even while they achieve inflation targets.</p>