10- Unemployment, Vacancies and Wages

Question 1

How do we denote the lifetime profit of a firm with a currently filled job slot?

Answer 1

J

Question 2

How do we denote the lifetime profit of a firm with ac currently filled job slot?

Answer 2

V

Question 3

What 3 factors shift the Vacancy creation curve out and why?

Answer 3

• increase in m, job matching becomes more efficient so vacancies are filled more quickly
• decrease in γ, the cost of posting a vacancy falls
• decrease in τ, probability of a worker becoming unemployed falls

Question 4

How do we denote the utility of an employed worker?

Answer 4

L

Question 5

How do we denote the utility of an unemployed worker?

Answer 5

U

Question 6

What are the 2 main implications when ϕ=1?

Answer 6

• Workers have full bargaining power

- The wage maximises the objective of workers

Question 7

What are the 2 main implications when ϕ=0?

Answer 7

• Workers have no bargaining power

- The wage maximises the objective of firms

Question 8

What is the objective of a firm in the wage bargain?

Answer 8

To maximise the value of a job match

Question 9

What is the objective of a worker in the wage bargain?

Answer 9

To maximise L-U; the value of being employed compared to the value of being unemployed

Question 10

How do we denote the real unemployment benefits paid to unemployed workers?

Answer 10

b

Question 11

How do we denote the probability that a worker finds a job in this period and becomes employed in the next period?

Answer 11

f

Question 12

What is the reservation wage (w^R)?

Answer 12

The wage at which workers are indifferent between employment and unemployment- it is a weighted average of the wage and unemployment benefits

Question 13

In which 2 situations is the weight on unemployment benefits higher?

Answer 13

• The probability of an unemployed worker losing their job (τ) is higher
• The probability of an unemployed worker finding a job (f) is lower

Question 14

What happens when θ increases?

Answer 14

The wage increases, so there is an upward sloping relationship between w and θ due to wage-setting

Question 15

In what 2 situations does the wage-setting curve shift out?

Answer 15

• If b increases, unemployment benefits increase, income of unemployed workers increase
• If γ increases, the cost of posting a vacancy increases

Question 16

What is involuntary unemployment?

Answer 16

When workers who are unemployed would like to have a job, so the utility of the employed is greater than that of the unemployed: L>U

Question 17

Why does the wage depend on the cost of posting a vacancy?

Answer 17

Because the more the firm has spent trying to hire the worker, the more valuable that worker is to them

Question 18

What is the complete model composed of?

Answer 18

Combining the Beveridge curve, vacancy creation curve and the wage setting curve

Question 19

Describe the 2 main steps of forming the complete model

Answer 19

• On a diagram with the wage and labour market tightness as axes, draw the vacancy creation and wage setting curves, their intersection gives wage and labour market tightness
• On a diagram with vacancies and unemployment as axes, draw the Beveridge curve, take the value of labour market tightness from the first diagram and draw the job creation line with slope θ, the intersection of the Beveridge curve and job creation line gives unemployment and vacancies

Question 20

In the complete model, what are the effects of job matching becoming more efficient (m increasing)?

Answer 20

• The vacancy creation curve shifts out and intersects the wage setting line at a higher wage and higher θ
• Increase in θ increases slope of job creation curve
• Inward move of Beveridge curve so the unemployment rate is lower

Question 21

In the complete model, what are the effects of the probability of becoming unemployed increasing (τ increases)?

Answer 21

• Vacancy creation curve shifts down and intersects the wage setting line at a lower wage and lower θ
• Decrease in θ decreases slope of job creation curve reducing vacancies and increasing unemployment
• Beveridge curve shifts out increasing vacancies and unemployment

Question 22

In the complete model, what are the effects of the cost of posting a vacancy increasing (γ increases)?

Answer 22

• Wage setting curve shifts up and vacancy creation curve shifts down
• Wage will rise or fall depending on which curve shifts more
• Decrease in θ so slope of job creation curve decreases
• Unemployment is higher and vacancies are lower

Question 23

In the complete model, what are the effects of unemployment benefits increasing (b increases)?

Answer 23

• Wage setting curve shifts up and intersects the vacancy creation curve at a higher wage and lower θ
• Decrease in θ decreases slope of job creation curve so unemployment is higher and vacancies are lower