Advanced Macroeconomics

Seminar 10
Search and unemployment
The supply side of the Labour Market
Participation choice in the labour market is described by the following equation:

𝑃(𝑄) = 𝑏 + 𝑒𝑚(1, 𝑗)𝑎(𝑧 − 𝑏)

The above relationship is visualized in the following graph:

When the labour market tightness (j) changes, we move along the P(Q) curve. For example, if j goes
up, then Q will go up aswell.

But if we keep j constant and there is a change in any of the parameters, the P(Q) curve will shift
upward or downward. Fill the following table and specify which direction will the P(Q) curve shift.
Specifically, indicate with X in the table below how the labour force participation (Q) changes at any
labor market tightness (j) if

increase no change decrease uncertain

unemployment insurance benefit (b) increases X
efficiency of matching (e) increases X
productivity (z) increases X
bargaining power of workers (a) increases X

1
The demand side of the labour market
Firms open new vacancies until the following condition holds:

1 𝑘
𝑒𝑚 ( , 1) =
𝑗 (1 − 𝑎)(𝑧 − 𝑏)
and this relationship is visualized in the following graph:

Specify in the table below how the measure of the labour market tightness (j) change if

increase no change decrease uncertain

costs of new vacancies (k) increase X
productivity (z) increase X
bargaining power of workers (a) goes up X
unemployment insurance benefit (b) increases X

2
Case 1. Increase in the unemployment insurance benefit

Indicate with X in the table how the following variable change in response!

Increase No change Decrease Uncertain

labour force X
labour market tightness X
unemployment rate X
vacancy rate X
wage X
output X

3
Case 2. Increase in productivity

Indicate with X in the table how the following variable change in response!

Increase No change Decrease Uncertain

labor force X
labor market tightness X
unemployment rate X
vacancy rate X
wage X
output X

4
Case 3. A decrease in matching efficiency

Indicate with X in the table how the following variable change in response!

Increase No change Decrease Uncertain

labor force X
labor market tightness X
unemployment rate X
vacancy rate X
wage X
output X