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ECON 2450
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CHAPTER 6 Search and Unemployment KEY IDEAS IN THIS CHAPTER1 The model constructed in this chapter is intended to explain Statistics Canada labor market data and to organize our thinking about the role played by the labor market in the macroeconomy2 Key labor market variables are the unemployment rate the participation rate and the employmentpopulation ratio3 In the DiamondMortensenPissarides DMP labor search model on the supply side of the labor market there are N consumers who choose between home production and labor market search On the demand side of the labor market firms can either be idle or can pay a cost to post vacancies The number of searching wouldbe workers and the number of searching firms determines the number of successful matches in the labor market through the matching function Each successful match produces output4 For consumers searching for work becomes more attractive the higher the market wage the higher is labor market tightness and the higher is the unemployment insurance benefit5 For firms posting vacancies becomes more attractive the lower is the cost of posting a vacancy the lower is labor market tightness the higher is productivity and the lower is the market wage6 In equilibrium a higher unemployment insurance benefit increases the unemployment rate reduces labor market tightness reduces the vacancy rate and has an ambiguous effect on the labor force7 In equilibrium an increase in productivity increases labor market tightness reduces the unemployment rate increases the vacancy rate and increases the labor force8 In equilibrium a decrease in matching efficiency reduces labor market tightness increases the unemployment rate and may result in an increase or a decrease in the vacancy rate The labor force decreases 9 A form of Keynesian analysis is introduced In the DMP model bargaining between a matched firm and worker determines the wage but bargaining strength can be sticky of the result of social norms which leads to Keynesian indeterminacy It is possible to have a bad Keynesian equilibrium where the wage and the unemployment rate are inefficiently high Copyright2013 Pearson Canada Inc 62
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