Macro Labour: Flows, Matching and the Beveridge Curve Flashcards
What are the 3 labour market states?
Employment, unemployment and inactivity
What does the labour force consist of?
The stock of employed and unemployed
What is the formula for the unemployment rate?
The stock of unemployed / labour force
What is the formula for the employment rate?
The stock of employed / population
What is the formula for the participation rate?
Labour force / population
Why is there no one-for-one relationship between employment and unemployment?
Because people can be inactive too
What labour market states does the search matching model only focus on?
Employment and unemployment
How do economic states affect the participation rate?
During a boom the participation rate will be higher
During a recession the participation rate will be lower
How do economic states affect the levels of inactivity?
During a boom inactivity will be lower
During a recession inactivity will be higher
What could be a policy that is used by a government to decrease the unemployment rate?
They could try a reduce the participation rate
How could a government decrease the participation rate?
Earlier retirement age, moving long-term unemployed to sickness benefits etc.
How can reducing the participation rate also reduce employment?
1) it increases the tax burden on the employed
2) competition for jobs reduces as the labour force shrinks
How will policies that reduce inactivity impact employment levels?
They will tend to increase employment
What policies could be used to decrease inactivity?
Later retirement age, reduced childcare allowances and single parent allowances etc.
According to the search theory, when is unemployment in steady state (equilibrium)?
When the flows into unemployment = flows out of unemployment
In the search matching model, what names are given to people moving into unemployment and people moving into employment?
Separations and Hires
In the search matching model, what are the nature of jobs and workers?
They are heterogeneous -> meaning that jobs and workers differ in skill
What will allow productivity to be maximised in the search matching model?
When the skills of the worker are matched as best as they can to the job
What is the formula of the matching function?
H = a(alpha). m(U,V) H = hires a = matching efficiency V = vacancies U = stock of unemployed m = general form of the matching function
What will happen to hires as a, U and V increase and why?
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
What factors will change a?
Exogenous factors e.g. increased marketing of new jobs, increased flow of information between people and vacancies
What formula denotes the flow of people from employed to unemployed?
S = sN s = exit rate from employment
What does that mean that the overall formula for the search matching model is?
sN = a.m(U,V)
What kind of returns is the search matching function characterised by?
Constant returns to scale
What is the finalised formula of the search matching function?
s = a.m(U/N, V/N)
What do U/N and V/N stand for in the search matching formula?
U/N = ratio of unemployed to employed V/N = vacancy rate -> per person employed, how many vacancies are the employer offering
What must s be for the Beveridge Curve to exist?
Constant
What does the Beveridge Curve show about the relation of u to v?
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
What can the Beveridge Curve also be seen to show the relation between?
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
How will changes in a shift the Beveridge Curve?
If a increases, the curve will shift left, if a decreases, the curve will shift right
How does the level of v impact the WS-PS model and why?
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
For a diagram about putting the WS-PS and Beveridge Curve together:
Check notes
How does extending the WS-PS model to factor in the Beveridge Curve benefit the model?
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
What is hysteresis?
Is the idea that the equilibrium of a dynamic system depends on the history of that system
What can hysteresis also be known as?
A ratchett pattern
What data can be used to support the idea of hysteresis?
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
What fears did people have that the financial crisis would lead to?
Fears arose that it would spark hysteresis -> several OECD economies experienced high and persistent unemployment
What is the main mechanism that we focus on for being behind hysteresis?
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
How will the size of the proportion of people in LTU affect the overall pool of unemployed workers?
It will shift WS right as the bargaining power will be reduced
For diagram about LTU and wage setting:
Check notes
