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EC204 Macro Notes > Macro Labour: Flows, Matching and the Beveridge Curve > Flashcards

Macro Labour: Flows, Matching and the Beveridge Curve Flashcards

1
Q

What are the 3 labour market states?

A

Employment, unemployment and inactivity

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2
Q

What does the labour force consist of?

A

The stock of employed and unemployed

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3
Q

What is the formula for the unemployment rate?

A

The stock of unemployed / labour force

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4
Q

What is the formula for the employment rate?

A

The stock of employed / population

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5
Q

What is the formula for the participation rate?

A

Labour force / population

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6
Q

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

A

Because people can be inactive too

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7
Q

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

A

Employment and unemployment

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8
Q

How do economic states affect the participation rate?

A

During a boom the participation rate will be higher

During a recession the participation rate will be lower

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9
Q

How do economic states affect the levels of inactivity?

A

During a boom inactivity will be lower

During a recession inactivity will be higher

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10
Q

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

A

They could try a reduce the participation rate

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11
Q

How could a government decrease the participation rate?

A

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

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12
Q

How can reducing the participation rate also reduce employment?

A

1) it increases the tax burden on the employed

2) competition for jobs reduces as the labour force shrinks

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13
Q

How will policies that reduce inactivity impact employment levels?

A

They will tend to increase employment

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14
Q

What policies could be used to decrease inactivity?

A

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

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15
Q

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

A

When the flows into unemployment = flows out of unemployment

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16
Q

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

A

Separations and Hires

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17
Q

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

A

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

18
Q

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

A

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

19
Q

What is the formula of the matching function?

A 
H = a(alpha). m(U,V)
H = hires
a = matching efficiency 
V = vacancies
U = stock of unemployed
m = general form of the matching function
20
Q

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

A

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

21
Q

What factors will change a?

A

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

22
Q

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

A 
S = sN
s = exit rate from employment
23
Q

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

A

sN = a.m(U,V)

24
Q

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

A

Constant returns to scale

25
Q

What is the finalised formula of the search matching function?

A

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

26
Q

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

A 
U/N = ratio of unemployed to employed
V/N = vacancy rate -> per person employed, how many vacancies are the employer offering
27
Q

What must s be for the Beveridge Curve to exist?

A

Constant

28
Q

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

A

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

29
Q

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

A

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

30
Q

How will changes in a shift the Beveridge Curve?

A

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

31
Q

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

A

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

32
Q

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

A

Check notes

33
Q

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

A

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

34
Q

What is hysteresis?

A

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

35
Q

What can hysteresis also be known as?

A

A ratchett pattern

36
Q

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

A

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

37
Q

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

A

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

38
Q

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

A

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

39
Q

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

A

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

40
Q

For diagram about LTU and wage setting:

A

Check notes

EC204 Macro Notes (8 decks)

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