Lecture 37: Unemployment - II

[Music] [Music] hi everyone welcome to lecture number 37 the second lecture on unemployment in our last lecture we discussed about the problem of unemployment we discussed about different types of unemployment what are the causes of unemployment and also we discussed about what are the consequences of unemployment in this lecture we'll discuss about the job search the job search behavior of the workers how do they search job in the labor market we'll also discuss about the Ws of her distribution WS of her distribution is nothing but the frequency distribution of potential job offers the wage rate and we'll also discuss about the asking W rate so the job offer distribution is the range the worker they know that if they are going to enter into the labor market they will get a wage rate between percent X to y but what is the asking wage rate the threshold wage rate that determines if the unemployed worker accept or rejects this incoming job offers so asking way is nothing but that threshold level Beyond which the worker will accept the job offer and Below which the worker will reject the job offer we'll discuss about that how this was asking W rate is determined and we'll discuss about the impact of unemployment in insurance on the duration of unemployment spill we have already discussed that uh the labor market observes a constant flux between employment unemployment and out of labor force and that that is why it makes the labor market very Dynamic at any point of time any given day you can say many people get those who are un employed they maybe belongs come out of that unemployed group and become out of Labor Force those who are out of Labor Force they can enter into the unemployment group those who are unemployed they can enter into the employed group those who are employed anytime they can become unemployed those who are employed also they can become out of labor force with their retirement and those who are out of Labor Force course they can anytime enter into the employed group so this continuous Dynamic flow goes on and it happens at any point of time in the labor market so this flow continues at any point of time so that's why this makes the labor market more Dynamic many theories that claims uh to explain that why unemployment exist and persist in a competitive labor market there are many theories let's uh uh begin our discussion of these alternative stories by reemphasizing that we could observe frictional unemployment even if there were no fundamental imbalance between the supply and demand for workers there could be some amount of frictional unemployment because different Farms offer different job opportunities and because the workers are not fully informed about what is there the best job and where the best jobs are located so it takes time to find uh the available opportunities in fact any given worker can choose from among many different job offers one can have so many job offers he has to choose because different Farms make different job offers to the same worker so these ways differentials for the same type of work encourage an unemployed worker to swap around until he or she finds a superior job offer now because it takes time to learn about the opportunities provided by different employers the search activities it becomes prolong and the duration of unemployment spill increases so the workers however is willing to endure a long-term unemployment spill because it might lead to a high paying job so in effect the S unemployment is a form of human capital investment and it depends on the discount rate at what rate the worker is going to discount so as I said this search unemployment is a form of human capital investment the worker is uh reinvesting in the information about the labor market so it takes time to learn about the opportunities and the suchar activities continues until he finds a higher paying jobs or a better job of her so how the worker is going to decide that how long his search should continue and where he should stop to simplify the analysis let's assume that only unemployed workers conduct this search activities however the workers those who are in job they also keep on searching for better jobs so at this point of time to make the things easier we are only considering that the workers those who are unemployed they are going for this search activities so it's easier to analyze the main implication of this search model if we restrict our attention to this unemployed workers only so the ways offer distribution gives the frequency distribution which describes various offers available to a particular unemployed worker in the labor market now when we are saying this job of a distribution the worker knows that he is going to get a wage rate between uh X to Y let's say so we can explain it in terms of graph here on the x-axis we have taken WS on the Y AIS we have taken the frequency of the W distribution now worker knows that if he enters to the labor market he will get the wage rate between 5 to 25 but the probability he knows that to get a job offer less than eight and more than 22 the probability is very less there is a high degree of probability that he will get uh a job offer between 8 to 22 so that's why the frequency distribution is like this if the search activities were free there is no cost Associated then the worker would keep on knocking from door to door until he finally hits the farm that paid the 25 wage rate so the search activities however we have seen it is costly it's not free each time the worker applies for a new job it incurs some trans quation costs certain other type of expenses are there like fees Farms he has to submit further there is also another type of cost it is the opportunity cost so he would have been working at a lower paying jobs he has left it and he is searching for a new job so there is an opportunity cost so in this case the workers economic tradeoff they're very clear the longer he seares the more likely that he will get a high wage rate high wage offer the longer he searches however the more it cost to find that job so there is a tradeoff between getting a highways offer versus the cost Associated to get that job job so the question is that when should the worker should stop searching and settle for the job offer what he is going to get so there are two types of approach to answer this question one is non-sequential search another one is sequential search each approach gives a stopping rule which tells the worker that when he should end his search activities let's discuss the non-sequential job search how the worker they do this non-sequential search in the labor market the worker could follow a strategy of this non-sequential job search in this approach the worker decides before he begins his search that he will randomly visit let's say 20 farms in the labor market and accept the job offer that pays the highest wage rate which will not necessarily be the job paying offer uh let's say 25 so this s strategy is not optimal how it is not optimal suppose on his first try the worker just happens to hit the farm that P $25 an hour so a non-sequential such strategy would force the worker to visit another 19 Farms knowing full well that he would never do better so it doesn't make sense therefore that uh for the worker to commit himself to a predetermined number of searches regardless of what happens while he is searching so in that sense it is not optimal so a better strategies one the sequential job search before the worker sets for a job search he decides that which job offer he is willing to accept for instance he might decide that he will not willing to work for less than let's say $12 an hour so the the worker will then visit one of the farm compare the wage offer to his desired $12 wage now if the wage offer exceeds $12 he will accept the job and stop searching and end the unemployment spell there now if the job offer is less than 12 he will reject the job offer and start searching for another job he will visit a new farm and compare the new W offer with his desired wage label until he find his desired W level this search operation will go on so the sequential strategy implies that if a worker is lucky enough to find a job which is going to give him $25 per hour on his first try so he will immediately recognize that he is lucky and he will stop the search process so this is how one uh can optimize his search job search behavior however there is an asking wage the asking wage is the threshold WS that determines if the unemployed workers accepts or rejects the incoming job offers there is a clear link between this workers asking W rate and the length of the unemployment spell that the worker is going to experience so the workers who have low asking wage rate will find acceptable jobs very quickly and un unemployment spell will be very short however the workers with high asking wage rate will take a long time to find the acceptable job and therefore the unemployment spell will be very long for them so we can summarize that the unemployment spell will last longer as the larger is the asking wage rate so when we are saying asking WS asking way uh is called the reservation ways in many studies we use the T asking ways to differentiate the threshold that determines whether an unemployed person accepts a job offer from the reservation ways defined in the labor supply model if you remember we discussed that what is the reservation wage reservation wage is that at what wage rate he enters into the labor market so reservation way determines whether a person enters to the labor market his decisions to work the intuition uh underlying the threshold ways in both the context is same however it is the ways that makes the worker indifferent between two alternative actions in the both the cases so the worker is deciding that whether to work or not to work accept the job offer or keep on searching the job so it's easy to explain how the uh worker determines his asking wage rate let's consider again the wage of a distribution suppose the unemployed worker goes out and samples a particular job at random It Could Happen by a pure chance that he visit the farm that pays the lowest wage possible that's $5 per hour so the worker has obviously been very unlucky in this search and he knows it so he must decide whether to accept this uh um job offer or to reject it by comparing the expected gain from one additional search means by how much would the wage offer increase if he is going to have one more search then how much ways offer is going to increase with the cost of the search so when he's going to have one more search definitely there is some cost associated with that so he must decide whether to accept or reject the offer by comparing the expected gain and the expected cost so if the offer at hand is only $5 per hour the gains to searching one more time are very high because he has already at the lowest point after all even if the worker instantly forgets which farm he visited today the odd of the hitting that the $5 Farm again tomorrow are very low so an additional search therefore will probably generate wage offer higher than $5 per hour so definitely it the probability is that he will get a farm he will find a farm who is going to pay more than $5 so the marginal gain from one additional search therefore is substantial now consider a situation the worker visits another farm and this time he gets $10 W offer so this incentive to continue the searching will again depend on partly on the marginal gain from one more search given the wage of a distribution there is still a good chance that additional search will generate a higher wage offer so the marginal gain to this additional search however is not as high as when the wage offer at the hand was only $5 so after all there is a chance that if he searches one more time he might hit a farm which is going to give him less than $10 per hour this could also happen let's take another situation suppose the worker decides to try his lock one more time and this time he hits the jackpot and getting the wage offer the $25 per hour so at this point the marginal gain from further search becomes zero so the worker cannot get a higher wage offer more than $25 per hour so if you look at these three situations it indicates that the marginal gain from each search are lower if the worker has a good wage offer at hand so as a result the marginal revenue curve that is the marginal gain from one additional search will be downward sloping as we have seen this asking ways is determined not only by the marginal gain from the searching but also by the marginal cost of the searching so every time he goes for additional search there is a cost Associated to that as we have already discussed there are two types of sarch costs the first is the direct cost which includes the transportation cost cost for the preparing the resume paying the fees the search activities are also time consuming even if the ways of offer at hand is $5 per hour W offer the worker who reject this offer and searches again it incurs a $5 opportunity cost so as a result we can see the marginal cost of searching one more time is higher and higher if the worker has a good way offer at the hand so the marginal cost Curve will be upward sloping so now the worker is going through a tradeoff so every additional way job search is going to decrease the marginal revenue from that job search and every additional job search is going to have some marginal cost which is going to increase so the asking wage rate is determined where this margin marginal cost equals to the marginal revenue now this can be explained through this graph here on the xaxis we have taken the wage offer at hand the value of the wage offers and on this axis we have taken the w r the cost associated with the additional job search and the revenue associated with the additional job search so as you can see the marginal revenue curve is downward sloping and once it reaches this 25 the next is is going to be zero so the marginal revenue curve gives the gain from additional job search it is downward sloping because better the offer at hands the less there is to gain from uh an additional search whereas you can see the marginal cost the W distribution curve is the frequency distribution is from this to this 5 to 25 the frequency distribution of the wte rate so the marginal cost gives the cost of an additional search and it is upward sloping because the better the job offers at the hand the greater the opportunity cost for an additional search so the asking wage rate is W hat is the asking wage rate where the marginal cost intersects the marginal revenue at Point let's say it is e so any point before this W hat now let's say at this point when the wage rate is 10 you can see the marginal revenue is higher than this marginal cost so which will induce the worker to go for another search and keep on going for searching the job until and unless he find this marginal cost equals to marginal revenue if you are taking this wage rate is 20 now we can say that he will not go further any job s because if he's going to have one more job search then he will find the cost is higher than the revenue so if the worker is lucky enough to get a wage rate which is $20 Which is higher than the asking wage rate he will settle down there he will not go uh Beyond uh that point for any search of her he will not go for any search so the determination of asking W rate depends on the uh intersection between this marginal cost and the marginal revenue curve so the workers asking we will respond to the change in the benefits and the cost for the sarch activities as we have seen all the human capital Investments the benefits from search are collected in future so they depend on the workers's discount rate at what rate the worker is going to Discount his investment in the human capital so workers with high discount rate they are more present oriented and therefore they perceive that the future benefits from the search will be low therefore for them the asking wage rate will be low and their marginal revenue curve for the sarch will be lower so workers who have high discount trate have the lower marginal revenue curves and hence in those cases we'll have the lower asking W rate because these workers do not have the patience to wait until a better offer uh they're going to get it so they accept the lower W offers and they s the unemployment spill so for them the unemployment spell will be shorter however a major component of this sarch cost is the opportunity cost the opportunity cost comes from rejecting a job offer and continuing the search so we have seen this unemployment insurance this unemployment insurance system we'll discuss it in detail is nothing but it compensate the workers those who are unemployed and who are actively engaged in job search activities suppose the worker has a wage offer at the hand let's say $10 per hour or $400 per week if he qualifies for this unemployment insurance scheme and gets the benefit of $200 per week the worker is only giving up $200 by rejecting the job offers so unemployment benefits therefore uh reduce the marginal cost of the search now we can see that how this discount rate and the unemployment insurance benefits can affect the asking W rate now when there is a high discount rate means the workers are more present oriented for them you can see in the graph panel a initially the marginal revenue was here and the marginal cost is here because the workers are having high discount rate they're more present oriented the marginal revenue car will be shift down and as a result you can see the asking wage rate is now W Hat 1 where it was W had zero now because of the high discount rate the marginal revenue was lower and the asking W rate is now low when some kind of unemployment insurance are there you can see in the graph panel B it reduces the marginal cost so as a result initially the asking wage rate was W had zero with mc0 and Mr now because of the implementation of this insurance benefit unemployment insurance benefit it has reduced the marginal cost and it has increased the asking wage rate so high discount rate reduces the asking wage rate unemployment insurance benefits increases the asking wage rate of the workers so a reduction in the marginal cost of search raises the asking wage rate as we have seen so the unemployment insurance system therefore has three important effects on labor market first it leads to a longer unemployment spill because the asking wage rate has increased second it increases the unemployment rate and third thir it leads to a higher post unemployment wage rate so in summary you can say that this job search model has two key predictions about the length of unemployment spill unemployment spill will last longer when the cost of searching Falls and unemployment spell will last longer when the benefits from this searching Rises so if you're going to increase the unemployment benefit then definitely the unemployment spell will be longer although the asking wage rate is not observed directly a number of surveys they have attempted to determine a worker's asking W rate by asking such questions that what type of work are you looking for and at what wage rate would be willing to take a job so these kind of questions can uh indirectly uh capture the asking wage rate of the workers if the workers self-reported asking wage rate is strongly correlated with their unemployment experiences we have seen that the studies have seen that the workers with self- reported asking wage rate is strongly correlated with the workers unemployment experience so workers who reported higher asking wages may experience longer unemployment spill moreover higher asking wages leads to uh High post unemployment wages now the question is that is this asking W constant over time is this fixed for the workers it depends on the marginal revenue and marginal cost asking wage rate depends on the marginal revenue and the marginal cost of the workers so if marginal revenue and the marginal cost of search were constant over time then the asking wage rate will be constant now you can say it in different words that an unemployed worker would have the same chance of finding a job in the first week of his unemployment spell as in in the 30th week of unemployment spill however it is unlikely that the probability of escaping unemployment is independent of the length of unemployment spell after all we have seen that this search is associated with some cost so the unemployed workers they have limited uh means with uh a liquidity constant which we say at some point of time so the worker will no longer have the cash required to keep his search activities going on so the liquidity constant forces the worker to recognize that he cannot spend the rest of his life searching for the best job possible and he will have to settle or less so because there is some kind of constant the worker is trying to maximize his job search with certain constants therefore as the worker the cash runs out the asking wage rate Falls the worker will then uh be willing to accept the job offer that were rejected at the beginning of the unemployment spell so this argument suggest that the probability of escaping unemployment Rises the longer the worker has been unemployed the job search Behavior there are several factors that can significantly impact the job search behavior in the labor market for a particular worker it depends on the economic condition of the economy the overall state of the economy the GDP the the growth rate of GDP the Industries the growth of the industries and also the availability uh and hiring practices of the Farms it also depends on educational skills the level of education training the skills posessed by the job Seekers it also depends on the experience employers often seek candidates with relevant work experiences it also affected by the networking the individuals the personal and professional network plays a significant role in finding a job opportunities further it depends on the geographical location the availability of jobs can vary depending on the region or the city further the job search is also affected by the industry and the sector which are the drivers of the job different Industries and the sectors have disting inct hiring practices job market dynamics and skill requirements further technological automation have a significant role on the job search Behavior certain demographic factors also influence the job search behaviors like as gender ethnicity disability status employers experience and the preference also plays an significant role each employer may have specific preference or criteria for hiring government policies and regulations also play a significant role in job search Behavior further the job search strategies how the individuals effectively going for these job search activities like resume writing soft skills interview skills globalization also plays a significant role in job search the increasing interconnectedness of the global economy can create both challenges as well as opportunities for the job Seekers so when we talk about this job search Behavior one policy implication is there the unemployment insurance unemployment insurance can have significant impact on the duration of unemployment spill let's talk about put some of the uh implications and the impacts of Unemployment Insurance on unemployment spill of the individuals first this unemployment insurance gives the income support to the individuals during his unemployed period so unemployment insurance provides financial assistance to the individuals who have lost their job and offering a source of income while they search for the new employment so this support can help unemployed individuals to meet their financial obligations reducing the urgency to accept the first available job opportunity that may not be the best fit for them so as a result this unemployment insurance can extend the duration of unemployment spill as the individuals take time to find a suitable employment second it also affects the job search intensity while unemployment insurance provides financial support it often uh comes with requirement for the recipients to actively engage in job search activities so to remain eligible for benefit to get this unemployment insurance the individuals typically uh they so some kind of activities that they are seeking for job and they applying for job they are attending job interviews and participating in job training programs so that they can get the job as quickly as possible so these requirements can uh incentivize the unemployed individuals to intensify their job search behavior and potentially shorten the duration of unemployment further the it can impact the their skill matching unemployment insurance benefits may allow the unemployed individuals to wait for job opportunities that better match their skills education career goals just instead of accepting the Ling or temporary jobs out of desperation recipients may have the flexibility to search the position for which they are better suited in the long term and also they can get higher wages while this can lead to longer unemployment spells it can also results a better job match in the labor market and it can give a higher job satisfaction in the long run further it can affect the duration of benefit unemployment insurance can affect the duration of benefits the duration and the genericity of this unemployment insurance benefit can influence how long the individuals remain unemployed if the unemployment insurance benefit is high then the longer will be the duration so longer benefit durations are the the high benefit amounts May provide a greater Financial Security and allow the individuals to take more time to find their job whereas if the benefit is shortterm and it's low amount it may create Financial pressure for the individuals to find employment as quickly as possible which will lead to uh shorten their unemployment spill unemployment insurance benefits affect the labor market conditions so the impact of this unemployment insurance on the duration of unemployment spell can vary depending on the prevailing lab market conditions let's say during the period of high unemployment when the job opportunities are scarce the unemployment benefit uh May prolong the unemployment spell as the individuals they struggle to find a suitable employment whereas During the period of low unemployment when the job opportunities are plentiful the unemployment iFit may have less of an impact on the duration of unemployment spill so overall the impact of unemployment insurance on the duration of unemployment spell is complex and can depend on various factors including the design of the unemployment program the behavior of the individual recipients and the broader macroeconomic labor market conditions so in our next lecture we'll discuss about how workers allocate their time over the business cycle considering the intertemporal substitution hypothesis when we talk about this in intertemporal substitution hypothesis there the workers have an incentive to allocate their time to work activities during those periods of the life cycle when the wages is high and to consume the Leer when the wages is low and the Leer is cheap so we'll discuss about how the workers they do the tradeoff their work hour with respect to leiser and participate in the labor market through this intertemporal substitution hypothesis we'll discuss about the sectoral shift hypothesis at any point of time some sectors of the economy are growing rapidly and other sectors are declining so we'll discuss how these sectoral shocks might create structural unemployment in the economy we'll discuss about the efficiency ways and unemployment policy implications of this Philips curve the relationship between inflation and unemployment thank you [Music] a [Music]