McCall and labor market frictions Flashcards
How much of fluctuations in hours worked per person is due to intensive vs extensive margin?
For most countries, extensive margin is more important (but still considerable variation due to intensive margin).
How much of fluctuations in hours worked is due to participation vs. unemployment?
In the US, participation accounts only marginally for cyclical variation in hours worked. Most cyclical variation in hours worked is due to unemployment
How large are wage fluctuations in comparison to productivity fluctuations?
Wages moves much less than productivity! This in contract to the predictions on the neoclassical models-
What is residual wage dispersion
How much of the observed wage dispersion that is not due to the differences in observables.
How much of wage dispersion does a typical mincer regression explain?
30%
R^2 is typically about 0.3
What is the qualitative idea with the McCall model?
Search frictions and offer distribution given reservation wage strategy. It generates a theory of residual wage dispersion that makes sense (some workers gets high offers, some gets low offers). However, the model has no chance of coming close to the empirical measures of wage dispersion.
This is a partial eq model with just workers
What is the interpretation of the LHS and RHS of the reservation wage equation in the McCall model?
- LHS = marginal cost of waiting (forgoing a wage from the offer minus benefit)
- RHS = marginal gain of waiting (the potential good wage that is waiting)
Waiting might thus bring me $w\geq w_R$. But I discount this with $r+\sigma$
Since, RHS is always greater than zero, we also get that $w_r > b$. If not, we would ha a positive “cost” and we could just keep waiting so we don’t forgo our benefit.
What is the intuition behind our process of studying whether we have a unique solution for the reservation wage equation in the McCall model?
Since LHS is increasing in w_R, we need that the LHS should decrease in w_R. Thus, using the Leibniz rule, we take the derivative of the RHS w.r.t w_R.
What do wee need to know if we where to explicitly solve for w_R in the McCall model?
The distribution of F
In the McCall model, how does the reservation wage respond to an increase in F and to an increase in the dispersion?
A uniform increase in F(w) obviously increases the reservation wage.
Dispersion:
If there is a mean-preserving spread in the offer distribution, that means there is greater mass in the tails of the distribution. Since it is mean-preserving, Ew will remain the same. However, greater mass in the tail means that the integral of the bottom part of the distribution will increase. Since the other values of the equation are parameters, they will not change, thus if there is a mean-preserving spread to the offer distribution, the reservation wage will increase.
Economic intuition behind the dispersion result:
There is also economic intuition behind the answer in part 3. The reservation wage is determined by the value of being unemployed.
In the vanilla McCall model, this consists of two parts: the benefit obtained from unemployment and the expectation on the wage offers a person can get. In this scenario, the unemployment benefit stays the same. However, the cdf of F(w) has more mass in its tails. While the change in mass of the wages less than the unemployment benefit don’t matter (since they will be rejected anyway) there will be an increase in the mass of the highest wages.
This will increase the expectation on the wage offers that would be accepted making it more likely to receive better wage offers. This makes it more valuable to stay unemployed so the reservation wage will increase in reaction to the expectation of having better job offers.
What will happen to observed wages as UI increases?
The observed wage distribution is given by
$$
G(w;w_R)=F(w|w>w_R)
$$
That is, what we observe are the wages that are above the reservation wage.
If we increase the reservation wage, then we will observe higher wages. We get stochastic domination, $G(w;w_R’) >G(w;w_R) \ \text{if} \ w_R’>w_R$
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💡 Everything that increases the reservation wage, will increase the observed wages
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State the law of motion of unemploymet and derive the SS unemployment
\dot u = \sigma(1-u_t)+\lambda u_t
Since in SS \dot u = 0. Solve for u
How will the reservation wage affect unemployment? Is it consistent with what we see in the literature?
That affects the reservation wage will affect unemployment. If it increases the reservation wage, unemployment will increse. This is since lambda is negatively affected by the reservation wage.
This is consistent with the findings in the literature!
What is the argument of Ljungqvist-Sargent (JPE 1998) regarding unemplyment, duration dependance and humancapital?
Argue that duration dependence is key for understanding difference in unemployment dynamics in Europe vs. US.
The key point is that human capital depreciates over time (the unemployment spell). We will have human capital tied to a previous wage high wage. The human capital depreciates, but employees still ha high reservation wages, this leads to the high unemployment rate.
- In 70-80’s: European countries had generous replacement rates tied to previous wage with close-to unlimited duration
- Human capital depreciation + unlimited duration may result in $w_R$ > $w_{offered}$ ⇒ long-term unemployment
- Makes little difference when macroeconomic volatility is low
- In late 70’s/80’s: macroeconomic volatility increased (oil price shocks) ⇒ difference in UI institutions can explain why Europe but not US got stuck in high (long-term) unemployment equilibrium
How well does the McCall model fit the data?
No! Using the Hornstein-Krusell-Violante metohod (do have a measure without F), we only get wage dispersion of around 1.04 and we should have a measure around 1.8 (what we see in data.)
