ECON 3102 Intermediate Macroeconomics

Lecture 10

Seungyoon Jeong

University of Minnesota

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Introduction

Search and unemployment

Labor Market Variables
A Simple Search-Matching Model

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Labor Market Variables

N : Working age population (age 15-64)

Q : Labor force (Employed plus unemployed)
U : Unemployed

U Q
= Unemployment rate, = Labor force participation rate
Q N

Q −U
= Employment/Population
N

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Labor Market Variable

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Unemployment Rate

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Deviation from Trend

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Labor Force Participation Rate

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Labor Force Participation Rate of Men and Women

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Deviation of Labor Force Participation Rate

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Posting Vacancy

At any point in time, firms recruit new workers by advertising job

vacancies they wish to fill
A : aggregate number of vacancies listed by firm

A
Vacancy rate =
A+Q −U

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Vacancy Rate and Unemployment Rate

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Beveridge Curve

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Key Labor Market Observations

The unemployment rate is countercyclical.

The unemployment rate and the vacancy rate are negatively
correlated (the Beveridge curve).
The Beveridge curve shifted out during the last recession.

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A Simple (One-sided) Search Model

We focuse on the behavior of an unemployed worker.

Unemployed worker receives wage offer with probability p
Wage offer w either accepted, or unemployed worker turns down
the offer and continues to search
All workers are either employed or unemployed. (No outside of
labor force)

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Value of the Employed and Unemployed

Value of an employed worker Ve (w ) :

- decreases with the separation rate s :
Value of an unemployed worker Vu
- increase with the Unemployment Benefit(UI), b
- increase with p, the frequency with which the
unemployed worker receives job offers

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Value of Employment

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Reservation Wage

Reservation Wage: the wage w ∗ at which the unemployed worker

is just indifferent between accepting and declining a job offer.
The unemployed worker turns down jobs with w < w ∗ , and accepts
jobs with w < w ∗ .
w ∗ is determined where Ve (w ) and Vu intersects

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Reservation Wage

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An Increase in the UI benefit

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Determining the Unemployment Rate in the One-Sided
Search Model

H(w ) = Fraction of workers receiving a wage offer greater than w .

As w increases, fraction of workers decreases. (Decreasing function
of w )

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The Function H(w )

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Long-Run Equilibrium Unemployment Rate

U =Unemployment rate
Long-run equilibrium: flow of workers from employment to
unemployment equals the flow in reverse direction:

s(1 − U) = UpH(w ∗ )
| {z } | {z }
Separation from Current Match Entering a new match

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Determining the Reservation Wage and Unemployment
Rate

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Determining the Reservation Wage and Unemployment
Rate

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(1) An Increase in the UI benefit

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(2) An Increase in the Job Offer Rate (p)

- Effect on Unemployment is Ambiguous

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Any Question?

Plan for this Week

I will solve some pratice problem tomorrow

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