2 = Labour Supply = The matching function

Question 1

What is a search friction?

Answer 1

impediments to a match between the employer and the person seeking employment = reasons why unemployment may exist / empty vacancies

Question 2

How is a market with search frictions different to the neoclassical market?

Answer 2

• not complete flexibility
• cant choose the hours you want to work - there are job contracts
• you have to accept or decline job
• you only find job offers intermittently

Question 3

What are the factors that determine search frictions - frequency you learn about jobs?

• what assumption has to be made

Answer 3

assume the only important job quality is wage and worker ignores culture, commute, holidays, hours

1. state of the labour market = how easy it is to get a job = productivity/unemployment
2. efficiency of job search = how easy it is to find a job = internet/recruitment agency

Question 4

What is evidence of frictions in labour market
- reasons the MS and MD dont clear

Answer 4

• US labour market 1990-2011
• Help wanted index and unemployment rates
• see that vacancies and unemployment coexists = implies market failure

Question 5

What are the reasons why unemployment and vacancies coexist?

Answer 5

1. geography
   - labour S and labour D exist in different places
2. skill specialisation
   - dont have the right skills
3. lack of information
   - dont know about all of the jobs

Question 6

How do we account for these factors (unemployment and vacancies) in our search model?

Answer 6

using a matching function

Question 7

What is a matching function?

Answer 7

Mathematical relationship that maps job seekers and vacancies into the number of matches made in a period of time

• output = number of workers hired per unit of time
• inputs = number of unemployed / number of vacancies

Question 8

How is the matching function influenced by search frictions?

Answer 8

the outcome of the matching process is influenced by geography, skills, lack of information

the more frictions present = the lower the number of workers hired

Question 9

How do you write the matching function?

Answer 9

Ht = m( Ut, Vt)
Ht = total number of per unit of time
Ut = number of unemployed per unit of time
Vt = number of vacancies per unit of time

Question 10

rewriting the matching function
- in terms of labour force

Answer 10

assume CRS

Ut/L = ut = unemployment rate
vt = vacancy rate
ht = hiring rate

ht = m(ut,vt)

Question 11

What is market tightness?

and equation

Answer 11

describes the state of the labour market - how easy it is to get a job

Ot = vt/ut
tightness = vacancies/unemployed

Question 12

if market tightness is > 1 (high)

Answer 12

vt > ut
easy to get a job
lots of vacancies for every unemployed person

Question 13

What is the probability a worker finds a job in a given unit of time?

Answer 13

p(Ot) = ht / ut
- hired / unemployed

Question 14

What is the probability a firm finds a worker in a given unit of time?

Answer 14

q(Ot) = ht / vt
- hired / vacancies

Question 15

How does probability of being hired and probability of filling a vacancy relate to each other?

Answer 15

p(Ot) = Ot * q(Ot)

probability of finding a job = market tightness * probability of filling vacancy

Question 16

Who benefits from high market tightness

Answer 16

• easier to find job - p(Ot) increases
• harder to fill vacancy - q(Ot) decreases
• good for workers
• bad for firms

Question 17

How do compute matching elasticity formula?

Answer 17

elasticity = need to find the power of Ut

= how does the relative movement of U and V determine hire rates

Question 18

How do you compute matching efficiency?

Answer 18

The coefficient at the start of UtVt

• Ht/Ut = At (Ot)^1-a
• log both sides
• regression to find parameters

Question 19

What is matching efficiency?

Answer 19

The productivity of the process for matching unemployed to vacancies
- how efficient it is

Question 20

What happens if market efficiency is small
= At

Answer 20

not an efficient market
- need lots of unemployed and vacancies to get hires

Question 21

What 2 flows make up unemployment?

Answer 21

p(Ot) = the rate workers leave unemployment
St = the rate workers leave employment

Question 22

What is a steady state of unemployment and why is it needed?

Answer 22

steady state = period where unemployment rate ut is constant

need to assume its constant to work out what unemployment rate is ut

Question 23

What are the 2 methods of calculating unemployment rate

Answer 23

1. count all of the unemployed in that given time
2. work out using the rate workers lose and gain jobs at that period
   - need p(Ot) and St

Question 24

game theory example of why vacancies and unemployed dont match

Answer 24

urn ball game