Job Search Flashcards
What are the reasons for unemployment in the economy?
- 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
How is unemployment distributed in the UK?
- Unevenly, 2018 figures:
- 4% white
- 7% other ethnicities
- 8% black
- only 2% of white people with a degree were unemployed
What are the assumptions for job search theory?
- 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
What are the two strategies for job searching?
- Optimal sample size rule
- Optimal no. of job applications to make
- Optimal stopping rule
- optimal wage offer to make seeker indiff. between accept or continue search
What is the key theory of the optimal stopping rule?
- Apply to vacancies 1 at a time
- Reject any wage offer below the reservation wage = wr
- Costs and benefits determined by f(w) = distribution of wages
- prob of finding vacancy offering wage over current offer = pr(w>wo) = 1 - F(wo)
How are costs calculated in the optimal stopping rule?
- MC has two components:
- Direct search costs eg transport to interview
- 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
How are marginal benefits of search calculated?
- Individual is unable to continue searching after accepting a job
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What are the determinants of the reservation wage?
- Level of benefits (b)
- Cost of search (c)
- Probability of interview success (lambda)
- Discount rate (r)
- Position/shape of wage distribution
How do benefits impact reservation wage?
How does the chance of a succesful application impaact reservation wage?
Higher chance = Higher wr - higher MB as they expect a wage above w0 with a higher probability
- This has important implications for business cycle and wr relationship:
- in a recession unemplyment increases and vacancy numbers fall, this fall in success chance leads to a fall in wage
- wr should therefore be pro cyclical
how does the discount rate impact the res. wage?
How does the shape of the wage distribtuion impact res. wage?
- Shift right in the distribution = ^Pr(w>wr) = ^wr
- Has ambiguous effect on search duration
- If variance increases then res. wage will increase too
What is the hazard rate to employment?
Hazard rate to U = h(t) = prob of finding a job = 1 - F(wr)
What are the two ket questions regarding unemployment duration?
- Does unemployment benefit impact of search?
- Does behaviour change over unemployment spell?
What is duration dependence?
- 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’
- wr 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
What is the key study on duration dependence and what did it find?
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
How does unemployment benefits impact unemployment duration?
- 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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What methods have been used ro overcome the negative effects of unemployment benefits?
- 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
What study was completed to see how training for unemployed impacts exit rate?
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
What did the Mueller et al study find?
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
What did the study by Spinnwijn find?
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 wr
- this helps avoid duration dependence trap
