4 and 5 - search and employment 1 and 2 Flashcards
Define one sided search model + assumptions
-One sided search model focuses on the interaction and behaviour of unemployed worker searching for employment in a simple economy.
-Assumptions:
-All workers in economy are employed or not, no trainees/students.
-Unemployed workers receives a wage/employment offer with the prob of this offer occurring being P.
-Wage offer w is either accepted or rejected by the unemployed workers depending on the reservation wage.
Describe the effect of changes in the unemployment benefit (one sided search model)
write down + graph
-changes in b affect the welfare of unemployed workers and w*.
-Changes in b shift the Vu curve affecting the resevation wage, which further effects H(w).
-Example, increase in b, unemployed workers demeaned higher reservation wage in as welfare of being unemployed has risen (less incentive to work). Higher w* is required to match and exceed additional welfare gain og being unemployed due to b. Vise versa.
Explain effect of changes in s (one sided search model)
-s refers to the seperation rate, rate at which employed workers are leaving jobs/employment and becoming unemployed. Layed off, quit etc.
-Changes in s affect the flow of workers from employment to unemployment (s(1- U)), therefore shift this curve. Changes in s also effect the utility of employed workers (Ve(w)) as it involves utility of job security therefore effecting w* due to changes in Ve(w). Changes in w* effect UPH(w) two effects.
Describe long run equilbirum in the one sided search model + equation/graph
-LR equilbirum in the one sided search model occurs when the flow of workers from unemployment equals the flow of workers in the other direction, from employment.
-Given by: s(1 - U) = UPH(w*)
-Graphically s(1-u) = downward and UPH(w*) upwards. Shifts in either equation effect number of unemployed workers.
Explain effect of changes in p (one sided search model)
-Changes in p affected the amount of unemployed workers receiving offers therefore the welfare of the unemployed workers (Vu). Causes shifts in Vu.
-Changes in P shift the UPH(w), increases in p shift the curve upwards decreases in p shift downwards (greater/lower flow of unemployed –> employed).
-Also Changes in Vu influence the w* which causes shifts in UPH(w*)
-Effect on unemployment is ambiguous due to both effects offsetting, depends which is greater magnitude.
-Eg) increase in p, improves welfare of U, therefore upward shift in Vu. Higher w. Higher p shifts UPH(w) curve upwards due to increased flow of workers from U to E and a reduction in the opposite direction (movement along the s(1-u) curve).
Higher w pushes UPH(w) curve downwards, effect on U is ambiguous due to offsetting effects.
Explain effect of w* on H(w) + define H(w)
-H(w) refers to the fraction of workers receiving a wage greater than the reservation wage.
-Higher w* leads to downward shifts in UPH(w*) curve as workers are more selective, fewer job offers will meet this desired wage (less willing to accept lower paying job offers lower H(w))
-Lower w* leads to upward shift in UPH(w), workers are less selective, are more job offers will be available at this lower w (more willing to accept lower paying job offers, higher H(w)).
Define Ve(w) and VU + what are effected by
-Ve(w) refers to the welfare of employed worker, which is a function of wage. Affected by s (utility of job security) and wage.
-Vu refers to the welfare of unemployed worker, increasing in p and b, vise versa.
Define the role of firms and consumers in a two sided search model
-Consumers can either decide to search for work or work outside the market, ‘home production’.
-Firms post vacancies with a cost of k in order to have a chance of a match with a searching worker.
Define matching efficiency (two sided search model)
-Matching efficiency, denoted e, refers to the productivity/efficiency of the process of matching consumers searching for work and firms listing vacancies.
define labour market tightness, j (two sided search model) + probabilty of match for firm and consumer
-Labour market tightness refers to the ratio of firms listing vacancies to the number of consumers actively searching for work.
-J = A / Q
-Higher J –> Tighter labour market suggests more vacancies available incentivises workers to search.
-Prob of match for firm = matching function / A: em(1/j,1)
-Prob of match for consumer = matching function / Q: em(1,j)
Define consumer, firm and total surplus from a match (two sided search model)
-Consumer surplus from a match = w - b
-Producer surplus from a match = z - w
-total surplus= z - b
Example) Describe the effect of increase in unemployment benefit b (two sided search model)
write on paper with graph
-In two sided model b represents benefit of not searching for work and opting for work outside the market ‘home production instead’.
-Increases in b, reduce total market surplus from a match and thus increase the reservation wage, w. Consumers searching for work require higher wage now to compensate for higher utility/benefit of not searching/home production (not searching become more attractive).
-Higher market wage, w, makes it less attractive for firms to hire and post vacancies, fall in A. Labour market tightness falls, lower vacancies, J falls.
-Rise or fall in Q as less incentive to search for work, lower supply of labour less payoff from match (lower a and j, higher b) and also incentive to search due to higher wage, ambiguous effect.
-Increase in B results in lower j, lower a, higher wage, lower surplus from a match. Effect on Q ambiguous, show both effects graphically.
-Graphically shown by a shift in supply curve.
Describe the effect of increase in productivity z (two sided search model)
write on paper with graph
-Increase in z / productivity leads to an improvement in total surplus (z - b) from a match as well as firm surplus (z - w).
-Increase in total surplus increases the market reservation wage, as workers get same share of a higher surplus from a match. Searching workers also become more productive, higher z, therefore demand higher wage.
-Higher Z, surplus for firms (profits) incentivises/makes it more attractive for firms to post vacancies (potential for higher profits due to higher z), A rises, J rises.
-J rises, tighter labour market, ratio of firms posting vacancies/searching workers increases makes searching for work more attractive, as chance of finding work/a match is higher. Increase in the supply of labour, higher potential pay off from match.
-Z increase –> w increase, j increase, A increase, Q increase, unemployment fallsdecrease.
-Shown graphically by shift in supply curve.
Describe the effect of decrease in e (two sided search model)
write on paper with graph
-Decrease in matching efficiency e, reduces a likelihood/probability of a match between worker and firm.
-Wage and total surplus within the labour market are unaffected, not influenced by e.
-Lower e leads to fall in a, less incentive for firms to post vacancies, lower probability of a match for cost k. Lower prob of match may not be justifiable for cost of posting, k. Lower demand for labour.
-Lower A reduces J, labour market less tight, lower incentive for workers to search for work, due to lower probability of match and no change in wage. Therefore fall in the supply of labour, Q, lower potential pay off.
-E fall leads to fall in A, fall in Q, fall in j and rise in U, fall in output Y.
-Shown graphically by shift in both demand and supply curves.
-describe equilibrium in the demand and supply side of a two sided search model
-Equilibrium in the demand side of the market occurs when the cost of posting a vacancy equals the expect4ed pay off of filling that vacancy (prob of match occurring * firm surplus from match).
em(1/j,a) = k / (z - w)
First part is demand curve equation on the graph^^
-Equilibrium in the supply side occurs when the expected pay off from a match for a consumer (probability of a match * surplus for consumer of a match) = P(q)
P(Q) = b + em(1,j)(w - b)
-Supply curve = P(Q)
Describe a two sided search model and match/matching function
-Two sided search model models the behaviour of consumers searching for work and firms posting vacancies in order to fill job positions. Matches occur based on a matching function.
-A match refers to when a consumer searching for work is matched with a firm posting a vacancy.
-Match function, similar to a production function, is a function of Q, A and e and produces matches between a consumer and firm.
-Given by m = em(Q,A)
