Macro Labour: Flows, Matching and the Beveridge Curve

Question 1

What are the 3 labour market states?

Answer 1

Employment, unemployment and inactivity

Question 2

What does the labour force consist of?

Answer 2

The stock of employed and unemployed

Question 3

What is the formula for the unemployment rate?

Answer 3

The stock of unemployed / labour force

Question 4

What is the formula for the employment rate?

Answer 4

The stock of employed / population

Question 5

What is the formula for the participation rate?

Answer 5

Labour force / population

Question 6

Why is there no one-for-one relationship between employment and unemployment?

Answer 6

Because people can be inactive too

Question 7

What labour market states does the search matching model only focus on?

Answer 7

Employment and unemployment

Question 8

How do economic states affect the participation rate?

Answer 8

During a boom the participation rate will be higher

During a recession the participation rate will be lower

Question 9

How do economic states affect the levels of inactivity?

Answer 9

During a boom inactivity will be lower

During a recession inactivity will be higher

Question 10

What could be a policy that is used by a government to decrease the unemployment rate?

Answer 10

They could try a reduce the participation rate

Question 11

How could a government decrease the participation rate?

Answer 11

Earlier retirement age, moving long-term unemployed to sickness benefits etc.

Question 12

How can reducing the participation rate also reduce employment?

Answer 12

1) it increases the tax burden on the employed

2) competition for jobs reduces as the labour force shrinks

Question 13

How will policies that reduce inactivity impact employment levels?

Answer 13

They will tend to increase employment

Question 14

What policies could be used to decrease inactivity?

Answer 14

Later retirement age, reduced childcare allowances and single parent allowances etc.

Question 15

According to the search theory, when is unemployment in steady state (equilibrium)?

Answer 15

When the flows into unemployment = flows out of unemployment

Question 16

In the search matching model, what names are given to people moving into unemployment and people moving into employment?

Answer 16

Separations and Hires

Question 17

In the search matching model, what are the nature of jobs and workers?

Answer 17

They are heterogeneous -> meaning that jobs and workers differ in skill

Question 18

What will allow productivity to be maximised in the search matching model?

Answer 18

When the skills of the worker are matched as best as they can to the job

Question 19

What is the formula of the matching function?

Answer 19

H = a(alpha). m(U,V)
H = hires
a = matching efficiency 
V = vacancies
U = stock of unemployed
m = general form of the matching function

Question 20

What will happen to hires as a, U and V increase and why?

Answer 20

Hires will increase when a increases as matching efficiency increase
Hires will increase when U increases as more workers are searching for jobs, so finding a match is easier
Hires will increase when V increases as more vacancies are available for the given stock of unemployed

Question 21

What factors will change a?

Answer 21

Exogenous factors e.g. increased marketing of new jobs, increased flow of information between people and vacancies

Question 22

What formula denotes the flow of people from employed to unemployed?

Answer 22

S = sN
s = exit rate from employment

Question 23

What does that mean that the overall formula for the search matching model is?

Answer 23

sN = a.m(U,V)

Question 24

What kind of returns is the search matching function characterised by?

Answer 24

Constant returns to scale

Question 25

What is the finalised formula of the search matching function?

Answer 25

s = a.m(U/N, V/N)

Question 26

What do U/N and V/N stand for in the search matching formula?

Answer 26

``` U/N = ratio of unemployed to employed V/N = vacancy rate -> per person employed, how many vacancies are the employer offering ```

Question 27

What must s be for the Beveridge Curve to exist?

Answer 27

Constant

Question 28

What does the Beveridge Curve show about the relation of u to v?

Answer 28

When u is high, then v must be low for that value of u to be in equilibrium For low u to be stable, then v must be high so that that value of u can be in equilibrium

Question 29

What can the Beveridge Curve also be seen to show the relation between?

Answer 29

The vacancy rate and the unemployment rate -> given that the formula for the unemployment rate is very similar to U/N (U/U+N) the relationship between it and v is very similar -> any changes to U or N will have very similar impacts on both terms

Question 30

How will changes in a shift the Beveridge Curve?

Answer 30

If a increases, the curve will shift left, if a decreases, the curve will shift right

Question 31

How does the level of v impact the WS-PS model and why?

Answer 31

The higher v is, the the higher the negotiable w will be able to be -> as v increases the labour demand increases which increases the worker bargaining power. If v is low then w is low as bargaining power is low as labour demand is low

Question 32

For a diagram about putting the WS-PS and Beveridge Curve together:

Answer 32

Check notes

Question 33

How does extending the WS-PS model to factor in the Beveridge Curve benefit the model?

Answer 33

It provides more reasons for why there can be changes in equilibrium unemployment: Barriers to occupational and geographical mobility will reduce a Forms of employment legislation may reduce the ability to employ workers Factors shifting both curves e.g. increased unemployment benefits will shift WS up and BC out

Question 34

What is hysteresis?

Answer 34

Is the idea that the equilibrium of a dynamic system depends on the history of that system

Question 35

What can hysteresis also be known as?

Answer 35

A ratchett pattern

Question 36

What data can be used to support the idea of hysteresis?

Answer 36

European u rate in the mid 70's to 80's looks consistent with hysteresis -> oil shock increased u and it remained high until 2012

Question 37

What fears did people have that the financial crisis would lead to?

Answer 37

Fears arose that it would spark hysteresis -> several OECD economies experienced high and persistent unemployment

Question 38

What is the main mechanism that we focus on for being behind hysteresis?

Answer 38

The idea that those who have been unemployed for a longer time will have less of a competitive impact on the labour market -> you will lose skills and productivity in LTU which may mean you need to be trained again

Question 39

How will the size of the proportion of people in LTU affect the overall pool of unemployed workers?

Answer 39

It will shift WS right as the bargaining power will be reduced

Question 40

For diagram about LTU and wage setting:

Answer 40

Check notes