UNEMPLOYMENT (1)

Question 1

Unemployment in neoclassical model

Answer 1

Wages always adjust to ensure labour market clears = NO involuntary unemployment. all unemployment is voluntary.

Question 2

Supply of labour in neoclassical

Answer 2

Can be fixed labour supply or upwards sloping.

Question 3

Neoclassical model is good at explaining

Answer 3

LR trends in participation - change between employment and out of LF.

Question 4

2 ways neoclassical model can explain gender specific change in LF participation

Answer 4

1. Higher demand for women’s labour due to tech change/sectoral change (also explains reduction in gender wage gap)
2. Higher female supply due to change in gender norms and tech change in home production.

Question 5

Weakness of neoclassical model

Answer 5

Doesn’t explain changes in unemployment since no unemployment in the model.

Question 6

How does introducing wage rigidity change the neoclassical model?

Answer 6

Wages don’t adjust following shock –> involuntary unemployment.

Question 7

4 reasons for wage rigidity.

Answer 7

1. LR contracts agreed in advance
2. Min wage
3. Unions and collective bargaining
4. Efficiency wages/

Question 8

2 limitations of wage rigidity model

Answer 8

1. Why is urate > 0 even in booms - unrealistic to assume w > w* at all times.
2. Is it realistic for LR contracts to be mutually inefficient (Barro critique) - in interest of workers and firms to cut wages in a recession.

Question 9

Search frictions =

Answer 9

Workers and firms cannot find each other immediately.

Question 10

What type of unemployment do search frictions generate?

Answer 10

Involuntary since workers are searching for a job but can’t find one.

Question 11

One-sided search model focuses on…

Answer 11

The search effort behaviour of workers.

Question 12

2 things we do NOT model in 1 sided model

Answer 12

1. firm’s search behaviour

2. Workers’ decision to be out of LF - we only model involuntary U.

Question 13

Fractions unemployed and employed

Answer 13

U = unemployed

1 - U = employed

Question 14

Separation rate =

Answer 14

S = the fraction of employed workers who lose their job every period = exogenous,

Question 15

p =

Answer 15

Probability of receiving a job offer.

Question 16

An unemployed worker with a job offer will compare…

Answer 16

1. The value of becoming employed Ve(W)

2. The value of staying unemployed Vu

Question 17

What does Ve(W) depend on? (2)

Answer 17

• Increasing and concave function of offered wage

- Decreasing in separation rate

Question 18

what does Vu depends on? (3)

Answer 18

Independent of wage
Increasing in b
Increasing in probability of getting another job offer next period.

Question 19

What do we assume about workers search efforts?

Answer 19

That once they accept a job, they stop searching even for a better one.

Question 20

Workers will accept an offer if…

Answer 20

w > reservation wage
So Ve(W) > Vu

Question 21

H(W) =

Graph looks like

Answer 21

The fraction of workers receiving a job offer greater than W. decreasing in W. Graph is non-linear but decreasing.

Question 22

Flow of workers from employed to unemployed

Answer 22

S(1 - U)

Question 23

Flow of workers from unemployed to employed =

Answer 23

UpH(W*)

Question 24

How do we find LR unemployment?

Answer 24

In the LR urate is stationary:
S(1 - U) = UpH(W*)
Solve for U once have functional form for H.

Question 25

If we increase b, what happens to LR unemployment?

Answer 25

higher b = higher reservation wage = fall in H(W*) = this pivots down = urate rises

Question 26

Trade-off with b

Answer 26

1. providing insurance

2. providing incentives