ch 11 search theory of unemployment
Download
Skip this Video
Download Presentation
Ch.11 Search Theory of Unemployment

Loading in 2 Seconds...

play fullscreen
1 / 31

Ch.11 Search Theory of Unemployment - PowerPoint PPT Presentation


  • 114 Views
  • Uploaded on

Ch.11 Search Theory of Unemployment. In reality, workers have imperfect information. Therefore, they search for more favourable wage rate. It is called search market.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Ch.11 Search Theory of Unemployment' - sorley


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
ch 11 search theory of unemployment
Ch.11 Search Theory of Unemployment
  • In reality, workers have imperfect information. Therefore, they search for more favourable wage rate. It is called search market.
  • Because of the imperfect information about equilibrium wage rate  a range of wages in labour market. (i.e. different wages for equally productive workers)  wage differential because lags in the transmission of market information (lack of perfect information).
search theory of unemployment
Search Theory of Unemployment
  • If one takes up a job, he will give up the opportunity for finding the same job at higher wage rate. In order to search this job, he will have search cost in terms of extra time, effort and wage forgone. Therefore, he must weight with gain from extra search against its cost.
search theory of unemployment3
Search Theory of Unemployment
  • Time spending on search increases
  •  lower probability of a worker searching the same job at higher wage rate. Therefore, the marginal benefit from search will decrease.
search theory of unemployment4
Search Theory of Unemployment
  • Time spending on search increases
  •  to sacrifice increasingly large amount of income earned. Therefore, marginal cost from search will increase.
  • diagram
search theory of unemployment5
Search Theory of Unemployment
  • MB > MC  continue to search a new job until MB = MC
  • Search unemployment = frictional unemployment
remarks
Remarks:
  • When job market information increases,
  • - opportunity of finding a better job will decrease. If you have perfect information, you need not search the job.
  • - the marginal benefit from searching a new job will decrease.
  • diagram
remarks7
Remarks:
  • The MB curve will shift to the left.
  • The no. of the search will decrease from S1 to S2.
  • The unemployment rate will decrease.
natural rate of unemployment
Natural Rate of Unemployment
  • Definition (91C9a):
  • The rate of unemployment at which upward and downward forces on prices and wages are in balance. It represents the lowest level of unemployment that can be sustained without causing accelerating inflation. The natural rate of unemployment is greater than zero because of the imperfect information.
why the natural rate of unemployment exists 93b2
Why the natural rate of unemployment exists ? (93B2)
  • 1) Part of the unemployment is frictional. It occurs because it takes time to find a new job.
  • 2) When there are structural changes in the economy, structural unemployment will exist.
why the natural rate of unemployment exists 93b210
Why the natural rate of unemployment exists ? (93B2)
  • 3) Search unemployment always exists when the labour market information is imperfect.
remarks11
Remarks:
  • Frictional / search unemployment : when a man cannot find a job for a long period of time  there is structural unemployment
why will the natural rate of unemployment increase 91c9
Why will the natural rate of unemployment increase? (91C9)
  • 1) Increasing the structural changes in industries will cause the structural unemployment. Therefore, the natural rate of unemployment (NRU) will increase.
why will the natural rate of unemployment increase 91c913
Why will the natural rate of unemployment increase? (91C9)
  • 2) Demographic changes:
  • For example, the labour force is increasing because more teenagers, minorities or women participate in economic activities but most of them cannot find the jobs because the jobs available are not enough. So the NRU will increase.
why will the natural rate of unemployment increase 91c914
Why will the natural rate of unemployment increase? (91C9)
  • 3) Inappropriate government policy
  • a) the government provides too generous unemployment benefits. This will reduce the workers’ willingness to work. So NRU will increase.
  • b) The government imposes the minimum wage law. This will increase the NRU.
why will the natural rate of unemployment increase 91c915
Why will the natural rate of unemployment increase? (91C9)
  • 4) Institutional rigidities
  • For example, restrictions set by the trade union will reduce the flexibility of wages and prices during the recession. This will increase the NRU.
measures to reduce nru 91c9
Measures to reduce NRU (91C9)
  • NRU can be lowered by the reform of labour market and wage and price setting mechanism. The measures are as follows:
  • 1) To improve the labour information services about job vacancies will reduce NRU.
measures to reduce nru 91c917
Measures to reduce NRU (91C9)
  • 2) To provide job training programmes to help unemployed workers will reduce NRU.
  • 3) To reform the government policies in order to reduce the workers’ disincentive to work, such as reducing the social benefits for unemployed will reduce the NRU.
measures to reduce nru 91c918
Measures to reduce NRU (91C9)
  • 4) To remove the minimum wage law will reduce the NRU.
  • 5) To encourage the workers to move from depressed industries to the developing industries, such as providing the retraining programmes will reduce the NRU.
measures to reduce nru 91c919
Measures to reduce NRU (91C9)
  • 6) To reduce the institutional rigidities by discouraging the restrictive practice by the trade unions will increase the labour mobility. So this can reduce the NRU.
remarks about search theory
Remarks about search theory
  • 1) Unemployment may not be wasteful ? (86 B6)
  • a) unemployment is not necessarily wasteful if unemployed workers are only those who are engaged in the search process for alternatives. They should search until marginal benefit from search = marginal cost from search. That is a wealth maximizing behaviour.
remarks about search theory21
Remarks about search theory
  • b) The structural changes in the economy will cause a reallocation of labour and other resources. The unemployment will help to reallocate the resources in more efficient way. It will be beneficial to the whole economy.
remarks about search theory22
Remarks about search theory
  • c) The NRU is economically unavoidable because the information about the job market is imperfect. Therefore, we cannot say something that is unavoidable is wasteful.
2 the nru is changeable by search theory
2) The NRU is changeable (by search theory)
  • a) Information about the job opportunities to the workers
  • - better information about the job market  the chance of finding the same job with higher wage rate will be reduced  the MB curve will shift to the left  the no. of search will decrease  the period for searching a new job will be shorter. Therefore, the NRU will decrease.
  • diagram
2 the nru is changeable by search theory24
2) The NRU is changeable (by search theory)
  • b) Government policy : if the government increases the unemployment benefit  the MC of search will be reduced  the MC curve shifts to the right  the no. of search will increase  the NRU will increase.
  • diagram
2 the nru is changeable by search theory25
2) The NRU is changeable (by search theory)
  • c) if providing a government central provident funds  workers are more likely to change jobs because they will not lose parts of provident fund  the MC of searching will be reduced  the frequency of changing the job will increase  the NRU will increase.
  • Diagram.
3 to measure the unemployment rate by search theory
3) To measure the unemployment rate (by search theory)
  • a) Search flow (in %)
  • - no. of layoff or quits and new entrants in the labour force within a period of time divided by the labour force.
  • b) Search duration (in %)
  • - no. of weeks or months (on average) it takes for an unemployed person to find a job divided by the no. of weeks or months in a year.
3 to measure the unemployment rate by search theory27
3) To measure the unemployment rate (by search theory)
  • c) unemployment rate
  • = Search flow X search duration
an example
An example:
  • Labour force = 100 million
  • No. of people changing jobs or searching jobs in a year = 25 million
  • It takes an average of 10.4 weeks to find a job.
suggested answers
Suggested Answers;
  • Search flow
  • = (25 millions/100 millions)X100%
  • = 25%
  • Search duration
  • = (10.4 weeks / 52 weeks)X100%
  • =20%
suggested answers30
Suggested Answers;
  • Unemployment rate
  • = 25% X 20%
  • = 5 %
  • Search flow is affected by the fluctuation in demand in the economy. Search duration is affected by information cost and search cost.
remarks31
Remarks:
  • 1) information cost increases
  •  search duration increases  u/e rate will increase
  • 2) Search cost increases  search duration will decrease  u/e rate will decrease
ad