8. Unemployment

Question 1

How is the simple competitive model of the labour market limited?

Answer 1

it assumes unemployed are choosing not to work because the market wage is lower than their reservation wage, it doesn’t explain cyclical unemployment or why the unemployed look for work

Question 2

What is the equation for unemployment rate in a steady state?

Answer 2

U/L= I/(I+h)

Question 3

Why is it important to know about both the incidence and duration of unemployment?

Answer 3

There could be very different policy and welfare implications

Question 4

What is the purpose of the job search model?

Answer 4

To study the behaviour of individuals who have imperfect information about jobs and wages

Question 5

How is the job search theory dynamic?

Answer 5

It can make predictions about the length of time an individual is unemployed

Question 6

What does rejecting a job offer depend on?

Answer 6

1. The probability of getting a better offer Pr(W>Wo)
2. The expected value of a better offer compared to the current offer E(w|w>wo)-wo
3. How often job offers appear
4. How heavily the future is discounted

Question 7

What is the optimal strategy for job searching?

Answer 7

Choose a reservation wage which equates costs and benefits of rejecting the offer

Question 8

How is reservation wage affected if job offers are more frequent?

Answer 8

The benefit of rejecting the offer increases so reservation wage increases

Question 9

Predictions of job search theory

Answer 9

1. Higher WR implies longer unemployment duration
2. Higher WR implies higher post unemployment wages
3. Higher benefits lead to longer unemployment duration
4. Lower job offer arrival rate leads to lower WR, ambiguous effect on unemployment duration

Question 10

Give empirical evidence of whether a higher WR increases search duration

Answer 10

• Jones 1988 asked people for their reservation wage and measured their unemployment duration
• there was no initial relationship but when he introduced an instrumental variable he found a positive correlation

Question 11

Give empirical evidence for whether unemployment benefits reduce job finding rate

Answer 11

•Lalive 2007 found increased benefits increase search duration by looking at a period where the duration of unemployment benefits depended on age in Austria

Question 12

Give empirical evidence on whether the reservation wage is constant over time

Answer 12

• if costs and benefits of searching stay constant so will WR
• this means job finding is constant over time
• however costs and benefits could change due to UB changing, job offer rate changing, job seeker facing liquidity constraints

Question 13

Why is a negative duration dependence worrying?

Answer 13

If being unemployed causes a loss of human capital then unemployment is even more costly

Question 14

What has happened to benefits over time?

Answer 14

There has been a reduction in benefits relative to min wage and mean wage

Question 15

What policies have been introduced to reduce benefits?

Answer 15

Job seekers allowance and the new deal

Question 16

What is the job seekers allowance?

Answer 16

• It was introduced in 1996 to replace UB and IS.
• duration of benefits were reduced and harder to qualify for them since you must have fortnightly interviews and can get sanctioned

Question 17

Why was JSA introduced?

Answer 17

To increase search effort and therefore decrease unemployment

Question 18

Did JSA work?

Answer 18

• policy evaluated before and after found search intensity increased
• manning used a difference in difference approach and found employment wasn’t significantly increased by JSA

Question 19

What is the new deal?

Answer 19

A way of incentivising workers to take jobs and employers to take workers

Question 20

What are the four stages of the new deal

Answer 20

• JSA (6months)
• gateway (4months)
• new deal options- environmental task force, voluntary sector, subsided jobs, education and training
• follow through

Question 21

What is an issue with comparing individuals in new deal and non new deal areas

Answer 21

They are likely to be substitutes for each other

Question 22

What was the impact of the new deal?

Answer 22

• economically important and statistically significant effect on outflows to employment
• 5 percentage point increase
• without programme 26% of finding job in 4 months, with its 31%
• effects are larger in the SR, may not be sustainable