Employment Flashcards
What is another name for the Phillip’s curve?
Short-run supply curve (it’s not clear what the supply is for…)
What relationship is summarized in the Phillip’s curve?
The relation (och tradeoff) between high inflation and high unemployment
How can the Phillip’s curve be exploited?
By altering supply of money, thus shifting the demand curve
What does “sticky wages” mean?
That wages don’t change until next period
Describe the process of bargaining for wages
Workers bargain for a nominal wage, based on the expected real wage, i.e. expected W/P, which is realized in the next period
In the NAIRU-model, is money supply exogenous or endogenous?
Money supply is exogenous
What is the formula for the Phillip’s curve?
∆p = expected ∆p – θ(U – U*)
What is the formula for the demand curve?
∆p = ∆M + λ(U – previous U)
What makes the demand curve shift upwards in the NAIRU-model?
An increase in money supply
…which leads to intersection at higher inflation and employment, because higher prices means lower real wages, meaning it’s cheap to hire.
What makes the supply curve shift upwards in the NAIRU-model?
Expectations of higher prices in the next period
…which leads to intersection at higher inflation and lower employment, because employees bargain for high nominal wages, leading to high real wages which makes it expensive to hire.
What makes the demand curve shift downwards in the NAIRU-model?
An decrease in money supply
…which leads to intersection at lower inflation and employment, because lower prices means higher real wages, meaning it’s expensive to hire.
What makes the supply curve shift downwards in the NAIRU-model?
Expectations of lower prices in the next period
…which leads to intersection at lower inflation and higher employment, because employees bargain for low nominal wages, leading to low real wages which makes it cheap to hire.
Which are the primitives of the NIARU-model?
P = price Pe = expected price W = wage rate U = unemployment 1-U = employment M = money supply
What does “adaptive expectations” mean?
Expectations will be based on last period’s outcome (“looking one year behind”)
What is the steady state of the lake model of unemployment?
π U = λ E
…which is rewritten as:
U / L = λ / π + λ
What is the formula for mean duration of unemployment?
1 / (1 – Fbar)
…meaning 1 / (1 - probability of getting a wage offer lower than the reservation wage)
Which variable is critical to unemployment benefits working?
Turbulence which can mean a sudden loss in skill at layoff, lowering the unemployed person’s potential wage in relation to the benefits they receive.
What does search intensity affect in Search model II?
It is more costly to the job-searcher, but increases the likelihood of drawing a wage offer
In a welfare state economy in search model II, you are unlikely to search for a job if you are laid off at a later stage in life. Why is this, and what does it lead to?
+ you had time to become skilled (and well compensated) earlier in life
+ employment benefits are a percentage of your previous earnings
- -> benefits are likely to be high
- -> your reservation wage is high
- -> you don’t take the jobs you’re offered
- -> drop in skills
- -> reservation wage in relation to skill level increase
- -> benefits (and thus reservation wage) increases in relation to wage offers
- -> net present value of the opportunity cost of being unemployed is lower when you are older
- -> lower search intensity
Name two threats to price stability
The temptation to exploit the Phillips curve (i.e. print money to shift demand curve upwards)
The temptation to print money to raise
NAIRU-model revenues for the government
What was Friedman’s contribution to the Phillip’s curve
The realization that nominal wages and real wages are very different, and that the Phillip’s curve only holds in the short run.
What does DSGE stand for?
Dynamic Stochastic General Equilibrium models
What is U*?
Natural rate of unemployment, i.e. the unemployment rate when expectations are correct p = p(e)
State the formula for probability of employment (search model)
1 – F (wbar) = π
State the formula for mean duration of unemployment
1 / (1 – F (wbar))
What is added when going from search model I to search model II?
- Unemployment compensation is earnings-dependent
- It is possible to retire
- It is possible to be laid off
- You have skills (which increase if you work and decrease if you are unemployed)
Why is turbulence relevant to the search model?
Because there is risk for some immediate skill loss at layoff. This impacts search intensity.
What is added when going from search model II to search model III?
• Shocks to productivity = wage per unit of skill evolves stochastically on the job
• Layoff costs
each job destruction triggers a tax that is paid to the government
• Age
