Macro - Week 3 Flashcards
Unemployment, efficiency wages, implicit contracts, insider/outsider-models, search and matching
Two basic issues of unemployment
- determinants of average unemployment over time: Does this unemployment represent a genuine failure of markets to clear and if so, what its causes and consequences are
- Cyclical behavior of the labor market; possbiility that the labor market is not Walrasian, and tha its non-Walrasian features are central to its cyclical behavior
issue with shifts in labor demand
appear to lead to large movements in employment and only small ones in the real wage; possible explanations: efficiency wages, implicit contracts, heterogeneous workers (search and matching models)
If ther is unemployment in a Walrasian labor market, unemploed workers immediately bid the wage down until supply and demand are in balance. Theories of unemployment can therefore be classified accordin to their view of why this mechanism fails to operate.
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Consider unemployed worker who offers to work for a firm for slightly less than the firm is curently paying, otherwise identical to current workers. Four possible responses by firm to this offer:
- Firm does not want to reduce wages. Theories in which ther is a cost as well as benefit to lower wages are known as efficiency-wage theories (name coes from idea that higher wages may rise productivity, or efficiency of labor)
- Firm whishes to cut wages, but through some agreememtnw with its workers cannot do so. Theories in which bargaining and contracts affect labor market are knwon as contracting models
- Does not accept the premise that the unempoyed worker is identical to the firm’s current employees. According to this view, each worker and each jo should be thought of as distinct; as a result, the process of matching up workers and jobs occurs not through markets but through search–>seach and matching models
- Accept the worker’s offer, that is, the market for labor is approximately Walrasian. In this view, measured unemployment consists largely of people who are moving between jobs, or who would like to work at higher wages than they can in fact obtain
Potential reasons for efficiency wages
- Nutrition: higher wages–>higher consumption–>healthier–>more productive
- Effort: higher wage can incerase workers’ effort in situations where the firm cannot monitor them perfectly. In a Walrasian labor market, workers are indifferent about losing their jobs, since identical jobs are immediately available. Thus, firing is not effective at incentivizing effort. But if a firm pays more than the market-clearing wage..
- Selection: if higher-ability workers have higher reservation wages, offering a higher wage raises the avreage quality of the applicant pool
- Loyalty: can build loyalty and thus induce high effort, conversely low wage can lead to shirking or sabotage
Unemployment pro- or countercyclical?
No clear trend
Real wage pro- or countercyclical
Procyclical
Labor supply elastic or inelastic? Constant or varies a lot?
Elastic and constant
Hysteresis and European unemployment
- A one-time adverse shock to labour demand leads to a persistent fall in employment. Idea that history affects the value of a current issue. In economics, hysteresis states that historical rates of unemployment are likely to influence the current and future rates of unemployment. If there is a recession and rise in cyclical unemployment, this temporary unemployment can affect the underlying structural rate and increase the natural rate of unemployment.
- Why does past unemployment affect future unemployment?
- If people are made redundant in a recession, then they may become demotivated and lose on the job training, which makes them less employable. After a period of unemployment, it is harder for them to find work. Also, firms may be more reluctant to take on workers who have been unemployed for a certain period.
- In a recession, people may lose jobs in manufacturing but may lack the skills to move jobs.
- Sticky wages / Insider-outsider models: If a worker loses his job, he becomes an outsider and is unable to influence wages. The remaining workers manage to prevent cuts in nominal wages, and so real wages don’t fall to retain equilibrium wage rates.
- Deterioration of skills
- Unemployed “accept” their situation
- Generous unemployment benefits in most (Western) European countries.
Search & matching: The idea
Diamond-Mortensen-Pissarides (Nobel Prize 2010): It takes time to find a job/worker because workers and jobs are heterogeneous. How can we explain unemployment duration? What policies can be used to reduce equilibrium unemployment? Can the search model explain the persistence in the unemployment rate? Can the model explain moderately procyclical real wages and countercyclical unemployment
Search model: Worker behavior
- Risk-neutral / infinitely-lived worker cares only for the present value of present and future income stream
- Receives wage w when employed and ‘unemployment benefit’ b when unemployed
Search model - firm behavior
Search model: Value of vacancy
Search model: Value of occupied job
Search model: Zero profit condition (1)
Search model: Zero profit condition (2)
Search model: Value of unemployment to worker
Search model: Value of employment to worker
Search model: Beveridge curve
Search model: Wage setting curve
Search model: Wage setting (1)
Seach model: Wage setting (2)
Search model: Wage setting (3)
Search model: Market equilibrium / full model
Search model: Equilibrium in the labor market - graphical analysis
Search model: Shimer puzzle
Search model: Shimer puzzle possible solution
Seach model: Prob. of unemployed finding a job
Search model: Prob. of vacancy being filled
Search model: Intro
