Foundations of Modern Macroeconomics Second Edition: Chapter 8: Search in The Labour Market

Introduction
Simple search model

Further policy shocks
Foundations of Modern Macroeconomics
Second Edition
Chapter 8: Search in the labour market
Ben J. Heijdra
Department of Economics & Econometrics
University of Groningen
1 September 2009
Foundations of Modern Macroeconomics - Second Edition Chapter 8 1 / 43
Introduction
Simple search model
Outline
1
Introduction
2
Simple search model
Firm behaviour
Worker behaviour
Wage setting and equilibrium
3
Further policy shocks in the search model
Labour taxes
Deposits on labour
Introduction
Simple search model
Aims of this lecture
How can we explain unemployment duration?
What policies can be used to reduce equilibrium
unemployment?
Can the search model explain the persistence in the
unemployment rate?
Introduction
Simple search model
Firm behaviour
Worker behaviour
Searching and matching (1)
Matching function:
XN = G(UN
+
, V N
+
),
X is the matching rate.
N is the number of workers.
U is the unemployment rate.
V is the vacancy rate.
G(., .) features CRTS (i.e.
G(UN, V N) = NG(U, V ) = NV G(U/V, 1). Example:
Cobb-Douglas matching function: XN = (UN)
(V N)
1
.
Further properties: G
U
, G
V
> 0; G
UU
, G
V V
< 0;
G
UU
G
V V
G
2
UV
> 0.
Introduction
Simple search model
Firm behaviour
Worker behaviour
Instantaneous probability of a vacancy being lled:
q
number of matches
number of vacancies
=
G(UN, V N)
V N
=
V N G(UN/V N, 1)
V N
= G(U/V, 1) q(
),
where is the indicator for labour market pressure:

V
U
If is high then there are relatively many vacancies so rms
with a vacancy nd it hard to get a match with an unemployed
job seeker (q is low).
If is low then there are relatively few vacancies so rms with
a vacancy nd it easy to get a match with an unemployed job
seeker (q is high).
Introduction
Simple search model
Firm behaviour
Worker behaviour
Continued.
For later use: the elasticity of the q() function:
()
q
dq
d
=
G
U
q
0 < () < 1,
Instantaneous prob. of an unemployed job seeker nding a job:
f
number of matches
number of unemployed
=
G(UN, V N)
UN
=
V N G(UN/V N, 1)
UN
= q() f(
+
),
If is high then there are relatively few unemployed workers so
unemployed job seekers nd it easy to locate a rm with a
vacancy (f is high).
If is low then there are relatively many unemployed workers
so unemployed job seekers nd it hard to locate a rm with a
vacancy (f is low).
Introduction
Simple search model
Firm behaviour
Worker behaviour
Continued.
For later use: the elasticity of the f() function:
f
df
d
=
_
q() +
dq
d
_

q()
= 1 +

q
dq
d
= 1 () > 0
Note the intimate link between the probabilities facing the two
searching parties, i.e. rms with a vacancy and unemployed
job seekers. [Two sides of the same coin.]
We now already have some duration denitions:
Expected duration of a job vacancy:
1
q()
Expected duration of unemployment spell:
1
f()
Introduction
Simple search model
Firm behaviour
Worker behaviour
Inow/outow equilibrium
s(1 U)Ndt
. .
(a)
= q()UNdt
. .
(b)
, (S1)
where s is the (exogenous) job destruction rate (due to
idiosyncratic match-productivity shocks.
(a) (expected) ow into unemployment.
(b) (expected) ow out of unemployment.
NB 1 Note: Large numbers, so frequencies and probabilities coincide.
NB 2 Equation (S1) implies equilibrium unemployment rate:
U =
s
s + q()
=
s
s + f()
Introduction
Simple search model
Firm behaviour
Worker behaviour
Remainder of the model solved as follows
(A) Firm behaviour.
(B) Worker behaviour.
(C) Wage setting.
(D) Market equilibrium.
Introduction
Simple search model
Firm behaviour
Worker behaviour
(A) Firm behaviour (1)
Analyze single-job rms (risk-neutral owner).
Focus on intuitive derivation.
Firms with a vacancy have the following arbitrage equation:
rJ
V
..
(a)
=
0
+ q() [J
O
J
V
]
. .
(b)
J
V
is the value of a (rm with a) vacancy; r is the interest rate
0
is the search cost of the rm with a vacancy
J
O
is the value of (a rm with) an occupied job
(a) capital cost of the asset.
(b) return on the asset: dividend [search costs] plus expected
capital gain [nding a worker, upgrading from vacancy to a
lled job].
Introduction
Simple search model
Firm behaviour
Worker behaviour
Assumption: free entry of rms with a vacancy:
J
V
= 0 0 =
0
+ q()J
O

J
O
=

0
q()
Hence, the value of a lled job equals the expected cost of
creating it [i.e. the cost of lling a vacancy].
Firms with an occupied job have the following arbitrage
equation:
rJ
O
..
(a)
= [F(K, 1) (r + )K w] sJ
O
. .
(b)
(S2)
F(K, 1) is the output of the single-job rm (note L = 1
substituted).
Firm rents capital at rental rate r + .
Firm hires labour at wage rate w [to be determined below].
Introduction
Simple search model
Firm behaviour
Worker behaviour
Continued.
(a) Capital cost of the asset.
(b) Return on the asset, consisting of the dividend [prot, i.e.
output left over after capital and labour have been paid] plus
the expected capital gain [experiencing a shock by which the
match is destroyed: downgrading from lled job to vacancy].
The rm hires capital such that J
O
is maximized:
max
{K}
(r + s)J
O
F(K, 1) (r + )K w
F
K
(K, 1) = r + (S3)
Introduction
Simple search model
Firm behaviour
Worker behaviour
Since J
O
=
0
/q() and F(K, 1) = F
K
K + F
L
we can
combine (S2) and (S3):
(r + s)
0
q()
= F(K, 1) F
K
(K, 1)K w
F
L
(K, 1) w
r + s
. .
(a)
=

0
q()
..
(b)
(ZP condition)
(a) The value of an occupied job, equalling the present value of
rents (accruing to the rm during the jobs existence) using
the risk-of-job-destruction-adjusted discount rate, r + s, to
discount future rents.
(b) Expected search costs.
NB Since rm search costs are positive (
0
> 0) it follows that
w < F
L
(workers do not get their marginal product!).
Introduction
Simple search model
Firm behaviour
Worker behaviour
(B) Worker behaviour (1)
Risk-neutral / innitely-lived worker.
Cares only for the present value of present and future income
stream
Receives wage w when employed and unemployment benet
z when unemployed.
Unemployed workers arbitrage equation is:
rY
U
..
(a)
= z + q() [Y
E
Y
U
]
. .
(b)
(S4)
Y
U
is the human wealth of the unemployed worker (who is
looking for a job).
Y
E
is the human wealth of the employed worker.
(a) Capital cost of the asset.
(b) Return on the asset: dividend [unemployment benets] plus
expected capital gain [nding a job and upgrading from
unemployment to being employed].
Introduction
Simple search model
Firm behaviour
Worker behaviour
(B) Worker behaviour (2)
Employed workers arbitrage equation is:
rY
E
..
(a)
= w s [Y
E
Y
U
]
. .
(b)
(S5)
Capital cost of the asset.
Return on the asset, consisting of the dividend [the wage]
plus the expected capital gain [losing ones job due to a shock
and downgrading from being employed to being unemployed].
Combining (S4) and (S5) yields:
rY
U
=
(r + s)z + q()w
r + s + q()
,
rY
E
=
sz + [r + q()] w
r + s + q()
=
r(w z)
r + s + q()
+ rY
U
Introduction
Simple search model
Firm behaviour
Worker behaviour
(C) Wage setting (1)
Generalized wage bargaining over the wage between the rm
and the worker.
Expected gain from striking a deal.
To the rm:
rJ
i
O
= F(K
i
, 1) (r + )K
i
w
i
sJ
i
O

J
i
O
=
F
L
(K
i
, 1) w
i
r + s
To the worker:
r
_
Y
i
E
Y
U
_
= w
i
s
_
Y
i
E
Y
U
rY
U
Introduction
Simple search model
Firm behaviour
Worker behaviour
Bargaining is over a wage, w
i
, which maximizes :
max
{w
i
}
ln
_
Y
i
E
Y
U
+ (1 ) ln J
i
O
J
V
..
=0
]
where 0 < < 1 represents the (relative) bargaining power of
the worker and Y
U
and J
V
= 0 are the threat points of,
respectively the worker and the rm.
Maximization yields the rent sharing rule:
Y
i
E
Y
U
=

1
_
J
i
O
J
V
(S6)
Introduction
Simple search model
Firm behaviour
Worker behaviour
There are two ways to turn the rent sharing rule into a wage
equation [details in the book].
1) After some substitutions we get:
w
i
= (1 )rY
U
+ F
L
(K
i
, 1)
Worker gets a weighted average of the reservation wage (rY
U
)
and the marginal product of labour (F
L
).
Introduction
Simple search model
Firm behaviour
Worker behaviour
Continued.
2) In symmetric situation we have K
i
= K and w
i
= w for all
rm/worker pairs:
w = (1 )z + [F
L
(K, 1) +
0
] (WS curve)
Worker gets a weighted average of the unemployment benet
(z) and the match surplus (F
L
+
0
).
The match surplus consists of the marginal product of labour
plus the expected search costs that are saved if the deal is
struck [ V/U so that
0

0
V/U represents the average
hiring costs per unemployed worker].
Introduction
Simple search model
Firm behaviour
Worker behaviour
(D) Market equilibrium
Summary of the model
F
K
(K, 1) = r + (T1)
0
q()
=
F
L
[K(r + ), 1] w
r + s
(T2)
w = (1 )z + [F
L
(K(r + ), 1) +
0
] (T3)
U =
s
s + q()
(T4)
Endogenous: K, w, , and U. Exogenous: r, s,
0
, and .
Model is recursive and can thus be solved sequentially:
(T1) yields K
as a function of r + [K
= F
1
K
(r + )].
(T2)-(T3) with K = K
inserted only depend on (and

determine) w
and
.
Once
is known equation (T4) determines U
.
Introduction
Simple search model
Firm behaviour
Worker behaviour
Figure 8.1: Search equilibrium in the labour market
U
V w
2
!
!
!
E
0
E
0
E
1
E
1
BC
ZP
WS
0
LMT
0
LMT
1
WS
1
!
(a) (b)
2
*
w
*
V
*
U
*
Introduction
Simple search model
Firm behaviour
Worker behaviour
Graphical analysis (1)
The model can be represented graphically in Figure 8.1.
ZP curve: [equation (T2)] supply of vacancies under free
entry/exit of rms.
Slopes downwards in (w, ) space:
_
dw
d
_
ZP
=
(r + s)
0
q()
2
q
() < 0.
Intuition: w increases the value of an occupied job [raises the
right-hand side of (T2)]. To restore the zero-prot equilibrium
the expected search cost for rms (the left-hand side of (T2)
must also increase, i.e. q() and .
Shifts up as
0
or as s .
Introduction
Simple search model
Firm behaviour
Worker behaviour
WS curve: [equation (T3)] wage setting curve.
Upward sloping in (w, ) space:
_
dw
d
_
WS
=
0
> 0
Intuition: the worker receives part of the search costs that are
foregone when he strikes a deal with a rm with a vacancy.
Shifts up as z or
0

In panel (a) the intersection of ZP and WS yields the
equilibrium (w
) combination. This is the ray from the

origin in panel (b).
Introduction
Simple search model
Firm behaviour
Worker behaviour
The Beveridge curve (BC) is given by equation (T4). It can be
linearized in (V, U) space as follows:
V =
1
1
s
s + f
f (1 )
U
where

U dU/U,

V dV/V , and s ds/s.
BC slopes down: for a given unemployment rate, V leads to
a fall in the instantaneous probability of nding a job (f ),
i.e. for points below the BC curve the unemployment rate is
less than the rate required for ow equilibrium in the labour
market (U < s/(s + f)). To restore ow equilibrium the U .
Shifts to the right as s .
Introduction
Simple search model
Firm behaviour
Worker behaviour
Shock 1: Increase in the unemployment benet
Suppose that z .
In Figure 8.1 this shock is illustrated.
WS curve to the left.
Equilibrium from E
0
to E
1
.
w
and
.
In panel (b) the LMT ratio rotates clockwise.
V and U .
Introduction
Simple search model
Firm behaviour
Worker behaviour
Figure 8.1: Search equilibrium in the labour market
U
V w
2
!
!
!
E
0
E
0
E
1
E
1
BC
ZP
WS
0
LMT
0
LMT
1
WS
1
!
(a) (b)
2
*
w
*
V
*
U
*
Introduction
Simple search model
Firm behaviour
Worker behaviour
Shock 2: Increase in the job destruction rate
Suppose that s .
ZP curve down in panel (a) of Figure 8.2.
Equilibrium from E
0
to E
1
.
w
and
.
In panel (b) the LMT ratio rotates clockwise and BC shifts
outwards [dominant eect].
V and U .
Introduction
Simple search model
Firm behaviour
Worker behaviour
Figure 8.2: The eects of a higher job destruction rate
U
V w
2
!
!
!
E
0
E
0
E
1
E
1
BC
0
!
ZP
0
WS
0
LMT
0
LMT
1
ZP
1
!
BC
1
A
(a) (b)
Introduction
Simple search model
Labour taxes
Deposits on labour
Labour taxes
The eects of labour taxes; t
E
levied on rms t
L
levied on
households.
The model becomes:
0
q()
=
F
L
(K(r + ), 1) w(1 + t
E
)
r + s
w = (1 )
z
1 t
L
+
F
L
(K(r + ), 1) +
0
1 + t
E
U =
s
s + q()
Introduction
Simple search model
Labour taxes
Deposits on labour
Labour taxes
In Figure 8.3 the eects of the payroll tax increase are
analyzed (t
E
).
WS curve to the right.
ZP curve to the left.
equilibrium from E
0
to E
1
and w
and
.
V and U .
Introduction
Simple search model
Labour taxes
Deposits on labour
Figure 8.3: The eects of a payroll tax
U
V w
2
!
!
!
E
0
E
0
E
1
E
1
BC
!
ZP
0
WS
0
LMT
0
LMT
1
ZP
1
(a) (b)
WS
1
!
Introduction
Simple search model
Labour taxes
Deposits on labour
Labour taxes
In Figure 8.4 the eects of the labour income tax increase are
analyzed (t
L
).
WS curve to the left [z untaxed!].
Equilibrium from E
0
to E
1
and w
and
.
V and U .
Introduction
Simple search model
Labour taxes
Deposits on labour
Figure 8.4: The eects of a labour income tax
U
V w
2
!
!
!
E
0
E
0
E
1
E
1
BC
!
ZP
WS
0
LMT
0
LMT
1
(a) (b)
WS
1
Introduction
Simple search model
Labour taxes
Deposits on labour
Deposits on labour
Workers as empty pop bottles.
Deposit scheme: rm pays a deposit b to the government
when it res a worker, to be refunded b when it (re-) hires that
(or another) worker.
Model becomes:
F
L
(K, 1) w + rb
r + s
=

0
q()
w = (1 )z + [F
L
(K, 1) + rb +
0
]
U =
s
s + q()
Hence, the capital value of the deposit (rb) acts as a subsidy
on the use of labour!
Introduction
Simple search model
Labour taxes
Deposits on labour
Deposits on labour
In Figure 8.5 we show the eects of b .
ZP curve to the right.
WS curve up.
Equilibrium from E
0
to E
1
and w
and
.
In panel (b) the LMT ratio rotates counterclockwise.
V and U .
The system works to combat unemployment!
Introduction
Simple search model
Labour taxes
Deposits on labour
Figure 8.5: The eects of a deposit on labour
U
V w
2
!
!
! E
0
E
0
E
1
E
1
BC
!
WS
0
LMT
0
LMT
1
(a) (b)
WS
1
ZP
0
ZP
1
Introduction
Simple search model
Labour taxes
Deposits on labour
Encore: Unemployment persistence in the search model
One of the stylized facts of the labour market: high
persistence in the unemployment rate.
Pissarides argues that loss of skills during unemployment can
explain this phenomenon.
Unemployed lose human capital [skills].
Are thus less attractive to rms, vacancy supply falls.
More long-term unemployment.
Introduction
Simple search model
Labour taxes
Deposits on labour
Punchlines
Central elements of the search model:
Search frictions.
Matching function.
Wage negotiations.
Beveridge curve.
Attractive model which abandons notion of the aggregate
labour market.
Holds up well empirically.

Foundations of Modern Macroeconomics Second Edition: Chapter 8: Search in The Labour Market

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Foundations of Modern Macroeconomics Second Edition: Chapter 8: Search in The Labour Market

Diunggah oleh

Hak Cipta:

Format Tersedia

Introduction

Simple search model

inserted only depend on (and

is known equation (T4) determines U

) combination. This is the ray from the

Anda mungkin juga menyukai