(a) Suppose that the matching function is given by: M = em(Q, A) = eQ^(0.7)A^(0.3) Express pc and pf as functions of e and labor market tightness j.
b) Suppose that z = 1, b = 0.4, e = 0.9 and k = 0.24. Suppose that w = 0.75 Find the unemployment rate in the economy.
(c) Suppose that e falls to 0.8. Suppose that w is unchanged. What happened to the unemployment rate, the labor force participation rate and output?
(d) Suppose that by law the wage is increased (while keeping all the parameters from part (c) unchanged). What is your prediction about the unemployment and participation rate?
Solution
(a) Suppose that the matching function is given by: M = em(Q, A) = eQ^(0.7)A^(0.3) Express pc and pf as functions of e and labor market tightness j.
b) Suppose that z = 1, b = 0.4, e = 0.9 and k = 0.24. Suppose that w = 0.75 Find the unemployment rate in the economy.
(c) Suppose that e falls to 0.8. Suppose that w is unchanged. What happened to the unemployment rate, the labor force participation rate and output?
Answer: E refers to the efficiency in the market. Output may fall but, unemployment would get reduced as more workers would be adjusted in the system. Hence participation rate would increase.
(d) Suppose that by law the wage is increased (while keeping all the parameters from part (c) unchanged). What is your prediction about the unemployment and participation rate?
Answer: all parameters keeping constant, may lead to increase in the unemployment rate as the employers would be compelled to pay more for same work in the market. Further, the participation rate also may fall down due to fall in the demand for recruiting the employees.
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(a) Suppose that the matching function is given by- M - em(Q- A) - eQ^.docx
1. (a) Suppose that the matching function is given by: M = em(Q, A) = eQ^(0.7)A^(0.3) Express pc
and pf as functions of e and labor market tightness j.
b) Suppose that z = 1, b = 0.4, e = 0.9 and k = 0.24. Suppose that w = 0.75 Find the
unemployment rate in the economy.
(c) Suppose that e falls to 0.8. Suppose that w is unchanged. What happened to the
unemployment rate, the labor force participation rate and output?
(d) Suppose that by law the wage is increased (while keeping all the parameters from part (c)
unchanged). What is your prediction about the unemployment and participation rate?
Solution
(a) Suppose that the matching function is given by: M = em(Q, A) = eQ^(0.7)A^(0.3) Express pc
and pf as functions of e and labor market tightness j.
b) Suppose that z = 1, b = 0.4, e = 0.9 and k = 0.24. Suppose that w = 0.75 Find the
unemployment rate in the economy.
(c) Suppose that e falls to 0.8. Suppose that w is unchanged. What happened to the
unemployment rate, the labor force participation rate and output?
Answer: E refers to the efficiency in the market. Output may fall but, unemployment
would get reduced as more workers would be adjusted in the system. Hence participation
rate would increase.
(d) Suppose that by law the wage is increased (while keeping all the parameters from part (c)
unchanged). What is your prediction about the unemployment and participation rate?
Answer: all parameters keeping constant, may lead to increase in the unemployment rate
as the employers would be compelled to pay more for same work in the market. Further,
the participation rate also may fall down due to fall in the demand for recruiting the
employees.
