Question

3. We study the effects of changes in labor productivity on the labor market in the long run in the context of the Mortensen-Pissarides model. For simplicity, unemployment benefits are set to b-0. In the long run, wages and recruiting costs are proportional to labor productivity: w = By and k = cy where b and c are two positive real numbers. Equilibrium market tightness with y and the unemployment rate with y. a. Does not vary, does not vary Increases; Does not vary with b. Increases; Decreases e. Does not vary; Increases c. Decreases; Increases Let u denote the unemployment rate, f the job finding rate, and s the separation rate. The law of motion for the unemployment rate is (where Au U+1 - uy is the change in the unemployment rate): Au = fu-s(1 - u). d. Au = fu+s(1 - u). b. Au = suf(1 - u). e. Au = su + f(1 - u). c. Au = s(1 - u)-fu.

Answer 1

3)d) As labor productivity increases, unemployment decreases as more labor are now employable and also, equilibrium market tightness increases.

4)c) Δu = s(1 - u) - fu