Search Matching and WS-PS model Flashcards
How does an increase in the vacancy rate affect wages?
It raises wages. An increase in the vacancy rate raises the job finding rate. This raises workers bargaining power, and firms need to offer higher wages to fill a vacancy.
WS Curve
W/Pc = b(u, v, z^w)
As the vacancy rate rises, the WS curve shifts leftwards or inwards. This is because workers demand a higher real wage, therefore fewer are willing to work at the prevailing wage.
What does a high vacancy rate imply for unemployment?
It implies a higher unemployment rate (as fewer people are willing to work at the prevailing wage). The WS curve shifts left, so in u,v space, the WS-PS curve shifts outwards.
Full Labour Market Equilibrium
Beveridge Curve = WS-PS curve.
At the intersection, the labour market is in flow equilibrium, and the real wage demanded by workers is equal to the real wage supplied by firms.
What if α falls?
The Beveridge Curve will shift outwards, meaning the stock of vacancies rises. This results in higher wages, and firms will respond by raising prices. The central bank will respond by raising rates, leading to a rise in unemployment.
Therefore, a fall in α is inflationary and leads to lower output.
What does a shift outwards in WS-PS curve do?
It results from a rise in wage and price push factors, leading to an outward shift along the Beveridge curve as the separation rate is constant.
Higher unemployment and Lower vacancy rate.
How would a rise in oil prices or fall in product market competition affect the PS curve?
It would shift the PS curve down, meaning real wages and employment have fell. Would shift the WS-PS curve out in u,v space, leading to a fall in vacancies and rise in unemployment rate.
