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Lecture 2: Frictional unemployment. I. The matching function. Frictional unemployment. We have seen foundations for «  classical unemployment » Frictional unemployment arises from continuous reallocation of workers between jobs

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lecture 2 frictional unemployment

Lecture 2: Frictional unemployment

I. The matching function

frictional unemployment
Frictional unemployment
  • We have seen foundations for «  classical unemployment »
  • Frictional unemployment arises from continuous reallocation of workers between jobs
  • In the models we have seen, unemployment would fall to zero absent the rigidities
  • We need to enrich these models
questions we want to ask
Questions we want to ask
  • What fraction of average unemployment is frictional?
  • Does frictional unemployment play a useful social role?
  • If so, what is the efficient level of unemployment?
  • How is frictional unemployment affected by growth, creative destruction, etc…?
  • Does the frictional component fluctuate?
the matching function
The matching function
  • Costly process of allocation unemployed workers to vacant positions
  • The matching function is the production function for the flow of new hires
  • The inputs are:
    • The stock of unemployed workers looking for jobs
    • The stock of vacant jobs looking for workers
hirings per unit of time
Hirings per unit of time
  • It is assumed to have the properties of a production function:
    • Constant returns to scale
    • Increasing in its arguments
    • Concave
properties of the beveridge curbve
Properties of the Beveridge Curbve
  • Steady state relationship between u and v
  • Downward sloping
  • Convex
  • The analysis can also be made in the (u,θ) plane where θ = v/u
labor demand shocks
Labor demand shocks
  • The θ falls when
    • c goes up
    • r goes up
    • φ goes up
    • y goes down
  • In steady state, this is associated with moves along the Beveridge curve
in u v
In (u,v):

v

E

E’

u

reallocation shocks
Reallocation shocks
  • We model it as an increase in s
  • The Beveridge curve shifts out (why?)
  • The labor demand curve shifts down
  • An increase in s is also a negative labor demand shock (why?)
in u v1
In (u,v):

v

E

E’

u

a deterioration in the matching process
A deterioration in the matching process
  • The Beveridge curve shifts out again
  • No effect of labor demand
  • Contrary to a (pure) reallocation shock, labor flows fall
business cycles
Business cycles
  • We can approximmate them by repeated switches between two values of y
  • They lead to loops around the Beveridge curve
  • Vacancies « lead » the cycle
  • Unemployment lags the cycle
long term unemployment
Long-term unemployment
  • The model can be used to have heterogeneous search intensity among the unemployed
  • LTU: lower search intensity than STU
  • And fraction of LTU larger after recessions
  •  the Beveridge curve deteriorates
  • Persistent effects of transitory shocks
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