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Flashcards in Unemployment Deck (113):

natural rate of unemployment d

rate of unemployment arising from all sources except fluctuations in aggregate demand


what are estimates of potential or full capacity gdp based on

long term natural rate of unemployment


what sectors was there a big decline in during the financial crisis

decline of construction sector (don't get extension or build new houses new kitchen etc),
decline of financial services sector


what did decline in construction sector and financial services sector create after the crisis

structural unemployment, workers formerly employed in sectors in decline would have harder time finding new jobs


what are the three possible states for a person aged 16+ years

N - non participation,
E - employed,
U - unemployed


examples of people in state N (non participation)

students aged 16+,
parents on parental leave,
long term sick,
discouraged workers


who makes up the employed fraction

full time workers,
part time workers


what are the conditions of unemployed

must have looked for a job in the last 4 weeks and must be available to work in the next 2 weeks


what is the labour force equation

L = E + U


what is the basic unemployment rate equations

u = U/L = U/E+U = 1/(E/U+1)


what happens to the unemployment rate when someone gives up looking for a job

they drop out of U so u goes down


what are the categories of negative effects unemployment can have

economic, social and psychological


how does u move with the business cycle

u is strongly counter-cyclical


is u uniform across the population

u not uniform across population,
young people have higher u's,
less-educated have almost always higher u's as well


what was u in Europe until 1980s

from 50s to early 70s very low between 2-3%,
by 1980s average u in Europe about 8%


what has been happening to the employment rate (E/L) and the participation rate (L/Pop) since the early 1970s for european men

employment rate and participation rate of european men have both trended downwards since the early 1970s


participation rate equation

L / population


employment rate equation

E / L


does collective bargaining still matter in europe

collective bargaining still matters substantially in Europe


what are three reasons why the labour market does not clear *

firms reluctant to reduce wages bec. of the negative impact this would have on their workers' productivity,
firms can't reduce wages bec. of wage agreements achieved through collective bargaining,
any any given time there are many unemployed people and vacancies


what are some frictions in the labour market

imperfect info about potential trading partners,
heterogeneous workers and firms,
geographical frictions,
congestion effects


what are search costs

the costs incurred by firms and workers in their attempts to find each other


what is s

job separation rate - prob of being separated from a job (layoff or quit)


what is f

job finding rate - prob of finding a job


in the model are s and f endogenous or exogenous

s exogenous, f endogenous


what is H

hires - the result of a trading technology called the matching function


what is the matching function

H = H(U,V),
constant returns to scale in U and V


what is f also equal to

f = H(1,v/u),
f = H/U = H(U,V)/U = H(U/U,V/U) = H(1,V/U) = H(1,v/u)


what is θ

labour market tightness


what is the matching function in intensive form

f = H/U = h(θ),
with θ = V/U = v/u,
so f = h(θ) = h(v/u)


what does a greater θ mean

tighter labour market, easier to find a job when relatively few job seekers per vacancy


what is ∆U

sE - fU


if ∆U=0 then what *

s(1-u) = fu,
after solving for u: u = s/s+f


formula for beveridge curve *

u = s / s+h(v/u)


what does the beveridge curve state

for a given degree of labour market tightness there is only one value of u compatible with ∆u=0,
this is because the beveridge curve is derived from the steady state


how do you get to the beveridge curve formula *

start from steady state when ∆U=0 and go from there,
actually learn how to do derivation, slide 36/125


what happens if θ goes down

θ down, f=h(θ) down, this results in u going up (beveridge curve)


what are the two graphs of the beveridge curve

y=θ x=u, downward sloping line,
y=v x=u, downward sloping line


what happens in recessions to u and v

v down, u up


what would an increase in s do to the beveridge curve

cause a shift outward of the BC


what would a deterioration of matching efficiency do to the beveridge curve

cause a shift outward of the BC


what would cause an outward shift in the BC

an increase in s,
a deterioration of matching efficiency


what is Wu

expected present value of income for an unemployed worker


what is We

expected present value of income for an employed worker


what is the long run value of the asset the sum of

next period's discounted cash flow,
discounted value of that asset one period ahead


what is the value of Wu *

Wu = b/1+r + fWe+(1-f)Wu / 1+r,
multiplying both sides by 1+r and cancelling,
rWu = b + f(We-Wu)


what is the per period return from being unemployed in words

benefit received in each period + potential capital gain (We-Wu), this realised with probability f


what is the value of We *

We = w/1+r + sWu+(1-s)We / 1+r,
multiplying both sides by 1+r and cancelling,
rWe = w + s(Wu-We)


what is the per period return from being employed in words

wage received in each period - potential capital loss (We-Wu), this realised with probability s


what is Πv

expected PV of profits from a vacant job


what is Πe

expected PV of profits from employed worker


what is q(θ) *

q(θ) = H/V = h(θ)/θ, probability of filling vacancy


what is the probability of filling a vacancy *

q(θ) = H/V = h(θ)/θ


what is the value of Πv *

Πv = -k/1+r + q(θ)Πe+(1-q(θ))Πv / 1+r,
multiplying by 1+r,
rΠv = -k + q(θ)(Πe-Πv)


what is the value of Πe *

Πe = y-w/1+r + sΠv+(1-s0Πe)/1+r,
multiplying by 1+r,
rΠe = y - w + s(Πv-Πe)


with free entry what do firms do

keep opening vacancies until no longer profitable to do so,
until Πv=0


what is the job creation condition (JCC) *

y-w / r+s = k / q(θ)


what is the left side of the JCC (y-w / r+s) *

the expected PV of profits from a filled job (employed worker)


what is the right side of the JCC (k / q(θ)) *

average cost of a vacant job since firms must spend k per period keeping the vacancy open and on average the vacant job remains unfilled for 1/q(θ) periods


what does the job creation condition (JCC) state

due to free entry, in equilibrium, expected PV profit from a filled job must be equal to average cost of a vacant job


what happens in Job creation condition (JCC) when w goes up *

if w up, expected PV profits from filled job go down,
firms respond by opening fewer vacancies, as v down θ down,
1/q(θ) down (average duration of vacant job) and this reduces the expected cost of a vacant job


how do you write the job creation condition in terms of wage *

w = y - (r+s)k/q(θ),
w = 1-0.0326√θ


what happens to Job creation condition (JCC) if y=w (y is output produced by worker)

no incentive to open vacancies so θ=0


what would happen if w=0

then θ would be a large positive number


how do you draw the job creation condition on a diagram

downward sloping line not touching axis


what is the unemployment equation UE *

u = s / s+f = s / s+h(θ)


what is an economic rent

difference between one's payoff and the minimum amount one would have required to accept selling or doing something


what is the worker's rent

opportunity cost of not being employed is being unemployed,
Rentworker = We - Wu


what is the firm's rent

opportunity cost of having a filled job is to have a vacant job,
Rentfirm = Πe - Πv = Πe,
since free entry implies Πv=0


what is the total surplus to be shared out with firms and workers

total surplus (S),
S = Rentworker + Rentfirm
S = We - Wu + Πe - Πv
S = We - Wu + Πe


what does surplus sharing depend on

it depends on the worker's relative bargaining power


what is the equation of the wage curve *

w = [(1-β)b + βy] + {βk} θ,
[vertical intercept], {gradient}


what does the unemployment equation show (u = s / s+h(θ))

there is a negative relationship between labour market tightness θ=V/U and steady state unemployment u, (greater number of vacancies relative to number of unemployed workers the easier it is to find work)


what does the wage curve show

higher the degree of labour market tightness, the greater the bargaining strength of workers and so the higher the bargained wage


equation for job creation line *

v = θ* u


what equation does b (unemployment benefits) only affect

the wage curve, shifting it upward in a parallel way


what happens when b goes up (affects wc, think about diagram back page 11 notes) *

b up, w* up, θ* down, so u* up and v* down


whats the intuition behind an increase in b (unemployment benefits) *

when b up, value of being unemployed Wu up,
gain from being employed (We-Wu) down,
upward pressure on wages results in higher w* up,
firms respond to higher costs by reducing vacancies v* down θ down,
because fewer vacancies reduces av duration (hence expected cost) of a vacant job until Πv=0 again


does b just capture unemployment benefits

no it also captures the value of other non-work activities


what is the effect of greater worker bargaining power (β)

very similar to effect of b (make sure you know what that is)


what could a greater separation rate (s) be due to

sectoral adjustments (so-called structural change)


what does a change in s do *

s affects the JCC shifts downward but still goes through (0,y),
hence w* down, θ down, u up, v*?,
graphically BC also shifts upward


what is the effect on the curves of a decrease in the wage rate y (JCC, WC) *

y down affects JCC shift down,
y down also affects WC shift down,
w* down but since βe(0,1),
vertical shift of JCC > vertical shift (βy down) of WC => θ* down,
(look at diagrams back of 12)


what happened to the beveridge curve between 1975-1984

shifted upward in 80s,
one interpretation due to frictions associated with Thatcher policies,
movements along a BC,
evidence of aggregate shocks instead of increase frictions/sectoral shocks


how are recessions and booms interpreted in the framework

recessions and booms interpreted as movements along a BC that result from changes in y


what did friedman use the term 'natural' to separate (natural rate of unemployment)

real forces,
from monetary forces


what is friedman's basic now well known point *

there is an unemployment rate which is determined by real factors,
this rate cannot be affected by monetary policy,
in other words long run phillips curve is vertical


what is different about friedman's basic point (natural level of unemployment) in the short run

actual inflation may deviate from expected inflation,
this can push ut above or below natural unt,
short-run phillips curve is downward sloping


what is the natural rate of unemployment d

rate of unemployment arising from all sources except fluctuations in aggregate demand


what are estimates of potential or 'full' capacity GDP based on

the long term natural rate of unemployment


what is the short-term natural rate *

incorporates structural factors that could temporarily affect the natural rate,
used to gauge the amount of current and projected slack in labour markets


what was the increase in the US u during the financial crisis

u=4.4% early 2007,
u=10% october 2009,
u=8.3% two years later


when does BC shift outward

decrease in matching efficiency,
increase in separation rate s


what should a deep recession do to labour markets

deep recession = y down for long time,
movement down a given BC,
and a slow decrease in u with a sluggish recovery


what are the four potential reasons behind the outward shift of the BC caused by decrease in a after the financial crisis * *

geographical disparities in location of workers and job opening,
structural change greater mismatch of worker's skills and skills required,
more generous b (unemployment benefit),
greater uncertainty


why is geographical disparities in location of workers and job openings a reason for the outward shift in BC after the financial crisis *

workers house-locked due to negative equity,
so more reluctant to accept jobs far away from home,
relocating is a difficult decision


is there much in favour of evidence for the geographical disparities shifting out the BC

unemployment duration increased similarly for both owners and renters,
migration rates did not fall more in states with larger share of underwater mortgages,
basically no


why is declining 'a' due to structural change (mismatch of skills) a reason for the outward shift in BC after the financial crisis *

decline of construction sector,
decline of financial services sector,
workers formerly employed in sectors in decline would have harder time finding new jobs


why is declining 'a' because of a more generous b (unemployment benefit) a reason for the outward shift in BC after the financial crisis *

decline in job-search intensity,
less pressure to accept a job offer,
more motivated to stay in labour force


why is declining 'a' because of greater uncertainty a reason for the outward shift in BC after the financial crisis *

hiring a new person is a form of investment,
value of waiting has gone up,
firms also more selective


what could be a reason for a shift leftward of the JCL after the financial crisis *

β down due to lower worker's bargaining power,
labour share of income fallen by 6.5 percentage points since early 2000s,


what is the impact of a lower β (worker bargaining power) since the financial crisis *

WC rightward,
JCL leftward, for any given u, filling a vacancy is now cheaper, so v up


what's some differences in labour markets in spain and france

same unemployment rate in 2007 - 8*,
in 2014 France's was 10.9%, Spain's 25.8%,
spain relies a lot more on temporary contracts,
mismatches in spain (skills, geographical) much greater


what are some labour market characteristics of France*

high employment and participation rates for 25-54,
high youth and 55+ unemployment rates,
high percentage of unemployed (44%) that are long term,
80% unemployed have no post-secondary or tertiary education


what are some labour market institutions of France *

minimum wage highest in OECD (affects 12% earners),
strict employment protection for permanent contracts because laying off workers for econ reasons is complex and can be costly,
generous unemployment insurance (2 to 3 years for people over 50, two third of wages for average earners)


features of France unemployment insurance

2 to 3 years for people over 50,
two-third of wages for average earners,
no sanctions for insufficient job search or refusal to participate in active programme,
allows some part-time work


what is v (lowercase)

vacancy rate (V/L)


what is h(θ)

matching function in intensive form


how does f link to h(θ) (matching function in intensive form)

f=H(1,v/u) from another card,
h(θ) = H(1,v/u),


draw the relationship between θ and u on a graph

downward sloping, think about it it makes sense


what is the derivatives of q(θ)

q'(θ) < 0,
q''(θ) > 0,
so 1 / q(θ) would decrease with a decrease in θ


difference between h(θ) and q(θ)

h(θ) = H/U, h'(θ)>0 and h''(θ)<0,
q(θ) = H/V = h(θ)/θ, q'(θ)<0 and q''(θ)>0


formula for average duration of employment spell rev