Term 2 week 10

Question 1

What is a two sided search model?

Answer 1

-Workers search for jobs
-Firms open vacancies and look for workers
-Search frictions prevent labour market from clearing

Question 2

What is the set up of the model on the household side and on the firm side?

Answer 2

-N number of households who can choose to be in our out of household

-Q number of workers in labour force

-Houses choose whether or not to join labour force based on expected payoff of a job.

Question 3

Graphically how can you show payooff for searching?

Answer 3

Q labour force x axis
Y payoff to searching
Upward sloping

Firms
firm must post a vacancy
cost k to posting the vacancy
A is number of people who post a vacancy
Firms that do not fill vacancy have no production
They produce z and pay wage w

Question 4

What is the matches?

What are the properties of the function

Answer 4

~Matching function
M = em(Q,A)

increasing in searching and vacancy
constant returns to scale
diminishing marginal products

shows matching function is subject to frictions.

Question 5

What is labour market tightness and what can it be denoted by?

Answer 5

-j

A/G

Question 6

What is the probability of a household finding a job?

Answer 6

ph = M / Q
= em(Q,A) / Q
= em(1,A/Q)
=em(1,j)

Question 7

What does a high j mean for households and firms?

Answer 7

For households it means easier to find a job
For firms harder to find a job

Question 8

What is the payoff for households?

Answer 8

Payoff of household searching is: P(Q) = ph . w + (1-ph)b

Question 9

What is the probability of filling a vacancy?

What is the most simplified version?

Answer 9

pf = M/A
= em(Q,A) / A
= em(Q/A,1) = em(1/j, 1)

em(1/j, 1) = k/ z-w

Question 10

What is the expected payoff of a firm searching?

Answer 10

pf . (z-w-k) + (1-pf) x (-k)

Question 11

What is the household job search

Question 12

The firms vacancy posting

Question 13

How are wages bargained for?

Answer 13

-When firms and households meet they must bargain a wage
-Follows john nash bargaining
-depends on the bargaining power and alternative for both parts.

Question 14

What is the surplus of the worker and surplus of the firm?

Answer 14

Difference between agreement and no agreement.

Sw = w - b
SF = z - w

Question 15

What does the Nash Bargaining theory say and how does it link to surplus

Therefore how can the surplus be written?

How does this help for the equilibrium?

Answer 15

Nash theory says that each person receives a total theory

Let a be fraction of surplus to the worker
and 1-a surplus to the firm

Sw = a x St
Sf = 1-a x St
you then sub in the expression for wage
w-b = a(z-b)
solve for wage

You then solve this in for wage

Question 16

What does unemployment benefit do for one-sided search model and two sided

Question 17

What are the two equations in the two-sided search model?

How is the equilibrium found?

Answer 17

P(Q) = b + em(1, j)(w-b)
em(1/j, 1) = k / z-w

To find EQ a wage must be decided

Question 18

What is total surplus?

Answer 18

Sw+Sf = z-b

Question 19

How do you show the two-sided search model equilibrium graphically

Answer 19

x axis , labour market tightness
y axis labour force

you draw one graph on top of the other

you find the probability of filling a vacancy equilibrium, then fill the j, then go up from the j and touch the worker cuvre.

Question 20

What is the following in two sided search model:

Unemployment
Vacancy rate
Agregate output

Answer 20

U = 1 - em(1 , j)
V = 1 - em( 1/j, 1)

Y = Qem(1,j)z

Question 21

What is the impact of higher productivity on both sides of the market?

Answer 21

Demand side the z in the denominator increases which makes the rhs go down, so LHS has to go down. So J increases, as firms find it more attractive to post vacancies.

-For the supply side (households), wages are higher
-It is easier to find a job as J increases.

Question 22

What is the comparative statics of an increase in productivity graphically

Answer 22

-On the demand side.
The probability of filling a vacancy is lower so this goes down on y axis.
-Then find new j for new probability of filling a vacancy

-On supply side the labour force will increase so payoff curve will pivo upwards

Question 23

What does an increase in unemployment benefit do to comparative statics?

Answer 23

as b is in denominator RHS increases so LHS increases which means j goes down.

On supply side
HIgher benefits increase participation rate as you must be part of labour force.
-Positive effect on wage as you can bargain

Unemployment increases , unclear to participation, unclear GDP

Question 24

How does two sided search model fit the data in terms of productivity?

What is it missing?

Answer 24

-Missing wage rigidities

Question 25

What is the comparitive statics of higher labour force insurance?

Answer 25

on the probability of finding a job, as b increases the p increases, find new j

Then go up to other curve
which shifts up

labour force goes downW

Question 26

Why is unemploment positive in two sided search model?

Answer 26

because it has frictions but it is not persistent enough

Question 27

Can neoclassical model, model unemplyoment

Answer 27

No as it needs search frictions

Question 28

For the two models how does increasing benefits impact them?

Answer 28

-For one sided it increases reservation wage
-for two sided it discourages opening vacancy for firms.

Question 29

Data
Which countries have the longest benefits

Answer 29

-Australia

Question 30

Are benefits responsible for cross country differences in unemployment

Question 31

What is the tradeoff between welfare and benefits?

Answer 31

-Benefits are impotant for welfare, but at the same time have a tradeoff for unemployment.

Question 32

How should benefits be designed to reduce the impact?

Answer 32

-contingent on search effort
-Generosity declining in the duration of unemployment
-Higher during relationship (unemployment)
-Accompanied by incentive for job creation