Job Search

Question 1

What are the reasons for unemployment in the economy?

Answer 1

• Wages above equilibrium (NMW)
• Sticky wages, can’t go down during a recession
• Natural rate of unemployment
• Frictional - betweeen jobs, can be reduced by increasing info to seekers and firms
• Seasonal - eg spike in U in summer due to school leavers
• Structural - skill mismatch
• Imbalance in no. of vacancies & searchers

Question 2

How is unemployment distributed in the UK?

Answer 2

• Unevenly, 2018 figures:
• 4% white
• 7% other ethnicities
• 8% black
  
  • only 2% of white people with a degree were unemployed

Question 3

What are the assumptions for job search theory?

Answer 3

• The theory is dynamic so can predict length of unemployment
• It is a compliment to the static labour supply model
• Workers know about the distribution of wages
  
  • Knows high and low but doesnt know which firms offer them
• ^wage offer = lower p. of getting higher offer = lower benefits of rejecting
• There are costs to earching

Question 4

What are the two strategies for job searching?

Answer 4

1. Optimal sample size rule
   
   • Optimal no. of job applications to make
2. Optimal stopping rule
   
   • optimal wage offer to make seeker indiff. between accept or continue search

Question 5

What is the key theory of the optimal stopping rule?

Answer 5

• Apply to vacancies 1 at a time
• Reject any wage offer below the reservation wage = w_r
• Costs and benefits determined by f(w) = distribution of wages
• prob of finding vacancy offering wage over current offer = pr(w>w_o) = 1 - F(w_o)

Question 6

How are costs calculated in the optimal stopping rule?

Answer 6

• MC has two components:

1. Direct search costs eg transport to interview
2. opportunity cost of forgone earnings

• Cost is increasing in the wage offer
• Unemployment benefit reduces search cost by amount b
• MC = cost of refusing offer and searching for one more period

Question 7

How are marginal benefits of search calculated?

Answer 7

• Individual is unable to continue searching after accepting a job
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Question 8

What are the determinants of the reservation wage?

Answer 8

1. Level of benefits (b)
2. Cost of search (c)
3. Probability of interview success (lambda)
4. Discount rate (r)
5. Position/shape of wage distribution

Question 9

How do benefits impact reservation wage?

Answer 9

Question 10

How does the chance of a succesful application impaact reservation wage?

Answer 10

Higher chance = Higher w_r - higher MB as they expect a wage above w₀ with a higher probability

• This has important implications for business cycle and w_r relationship:
  
  • in a recession unemplyment increases and vacancy numbers fall, this fall in success chance leads to a fall in wage
  • w_r should therefore be pro cyclical

Question 11

how does the discount rate impact the res. wage?

Answer 11

Question 12

How does the shape of the wage distribtuion impact res. wage?

Answer 12

• Shift right in the distribution = ^Pr(w>w_r) = ^w_r
• Has ambiguous effect on search duration
• If variance increases then res. wage will increase too

Question 13

What is the hazard rate to employment?

Answer 13

Hazard rate to U = h(t) = prob of finding a job = 1 - F(wr₎

Question 14

What are the two ket questions regarding unemployment duration?

Answer 14

1. Does unemployment benefit impact of search?
2. Does behaviour change over unemployment spell?

Question 15

What is duration dependence?

Answer 15

• High duration of unemployment can act as a signal of bad quality to employers - reducing h(t)
• ‘the chance of remainng unemployed for one more period depends on the periods one is already in unemployment’
• w_r may fall over time with reduced opportunities (^h(t))
• There is evidence to support the idea of duration dependence
  
  • exit rate depends on time unemployed
  • Hard to maintain ceteris paribus though as the U pool changes

Question 16

What is the key study on duration dependence and what did it find?

Answer 16

Kroft et al. (2013) - mailing experiment

• Sent out a large number of fictitious job applications for real vacancies
• The applications had a random duration of U
• Found call back rate is on average lower for those higher longer durations of unemployment
• This results were stronger in thriving labour markets where there were lots of opportunities available

Question 17

How does unemployment benefits impact unemployment duration?

Answer 17

• if benefits run out at a certain point in time wed expect to see an ^h(t)
• American studies found a spike in exit to employment near the benefit exhaustion
• There is some evidence that suggests less generous benefit scheme = lower job quality (wage)
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Question 18

What methods have been used ro overcome the negative effects of unemployment benefits?

Answer 18

• Netherlands - you get sanctioned if the authorities discover their wage requirements are above the level of benefits they receive
• Some US States: bonuses are offered to those who find a job within a short period of time
  
  • a random sample of these found it had a positive impact
  • Accepted wages dont differ to normal, more thought and care put into more applications, not just accepting a worse job quickly
  • Allows them to escape the duration dependence trap
• Benefits subject to monitoring and councelling - training is recommended in this councelling
  
  • Training can be seen as unpleasant
  • Seekers include training as cost of search

Question 19

What study was completed to see how training for unemployed impacts exit rate?

Answer 19

Black et al (2003)

• Exploits a particularity of th US U insurance system
• Jbb seekers given socre from 1 to 20 where 20 = most likely to exhaust benefits
• Gives mandatory training to scores with 20, then to 19, moving down till the fixed budget runs out
• When theres not money for a whole group, people are selected at random, providing a good comparison group
• Results found that those invited on the prgram have a higher exit rate
  
  • this impact is seen before the program even starts

Question 20

What did the Mueller et al study find?

Answer 20

Mueller et al. (2019)

• survey data found perceived job finding rates were above actual rates
• ^1% perceived prob = ^0.62% actual prob
• Found job seekers dont reduce PR with U duration
  
  • If anything they do the opposite
  • gamblers fallacy - ^hardship = ^demand for positive expectations
• Found that perceptions of aggregate conditions are an important river of U duratio but these tend to be ill informed
• 10% long term U due to job seeker optimism

Question 21

What did the study by Spinnwijn find?

Answer 21

Spinnwijn (2015)

• Optimism leads to higher res. wage, unemployed running down savings quicker and reduced job search intensity
• Argues benefits could go from low to high instead of low to high
  
  • with low b MC shifts left decreasing w_r
  • this helps avoid duration dependence trap