Static Model #3 Flashcards
Week 6
1
Q
What is ‘Search-and-Matching’?
A
- S&M is a real rigidity within equilibrium
- This is the time/money required to match the correct person with the job (with asymmetric information)
2
Q
Why is the NC model sometimes not helpful?
A
- Doesn’t explain extensive margins (N&l don’t change as z does)
- Assumes symmetric information
- Therefore, we must introduce the DMP model, which accounts for labour market frictions and can explain extensive margins
3
Q
What is the unemployment rate?
A
- U / Q
- Where U is the number of unemployed people and Q is the total labour force
4
Q
What is the participation rate?
A
- Q / N
- Where Q is the total labour force and N is the working age population
5
Q
What is the employment rate?
A
- E / N
- Where E is the number of employed people and N is the working age population
6
Q
What is the vacancies rate?
A
- V / A
- Where V is the vacancies unfilled and A is the total vacancies
7
Q
What is labour tightness (j)?
A
- A / Q
- Where A is the total vacancies and Q is the total labour force
8
Q
Explain the equation for labour supply
A
- Each N consumers can choose to work outside of the LM to search for a job
- Q denotes the quantity of consumers looking for a job, of which M find a job (Q-M = U)
- As Q rises, the expected payoff of searching for a job rises
- If you join Q, you receive w and if you leave Q you receive b
- PAYOFF: [M / Q * w] + [(Q-M) / Q * b ] = P (Q) [function]
9
Q
Explain the equation for labour demand
A
- To fill a job, a firm must post a vacancy to match with the search
- A denotes the number of active posts, with only M being filled
- There is cost ‘k’ of posting a job
- Expected payoff should be 0, because of competition
- If a vacancy is filled, the profit = z - w - k; if not, profit = -k
- PAYOFF: [M / A * (z - w - k)] + [(A-M) / A * (-k)] = 0
10
Q
Explain the equation derived from the Nash Bargaining
A
- States 0 search friction, and consumers get utility while firms get profit
- Wage is determined by competition, and both parties have to bargain
- Surplus=> w - b (cons) + z - w (prod), thus total = z - b
- The share of each side depends on the bargaining power (a/1-a) [a is unions]:
- w - b = a (z - b) OR z - w = (1-a)(z - b)
- Nash equilibrium wage => w = az + (1 - a)b
11
Q
Explain the equation derived from the search and matching tool
A
- Matching function: M = e * m(Q,A), where e is the matching efficiency (TFP,z)
- CRS is assumed, so m(Q,A) rises alongside Q and A
- [m(Q,A) / A] = [m(1/j, 1)]
- [m(Q,A) / Q] = [m(1, j)]
12
Q
How can you find the equilibrium (show maths and graphs)
A
- MATHS: using the 4 equations, substitute LS and LD into the other two equations, giving:
- SS: b + [e*m(1,j)] * a (z-b) = P(Q)
- DS: [e*m(1/j,1)] = k /{1-a}{z-b}
- GRAPHS: Plot P(Q) [+ve] and em(1/j, 1) [-ve], j* and Q* can be found in the 2nd line and the 1st line respectively
13
Q
What are other endogenous variables in terms of e, m and j?
A
- U = 1 - em(1, j * ) {SLS}
- v = 1 - em(1/j * , 1) {DLS}
- Y = Q * [em(1,j * )]z
14
Q
What is the Beverage curve?
A
- As j increases, u falls and v rises
- This means that u = -αv
15
Q
What happens to Q * /j * when b rises?
A
- The equilibrium j drops
- This means that P(Q) shifts upwards because of the higher b, giving a lower Q
- This is because of the greater unemployment benefits, so some may not participate
