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ECON 403 Group Presentation
2
Searching for the fun in fundamental surplus
Cause girls just wanna have (fun)damental surplus
UNEMPLOYMENT
"An unemployed existence is a worse negation of life than death itself."
-José Ortega y Gasset
Unemployment is a perenial issue faced by economists. We seek to understand it so that we may end it. This paper brings up one step closer to the silver bullet.
UNEMPLOYMENT
Findings
The Fundamental Surplus
The difference between a worker's productivity and their wage
Productivity - y
Findings
Fundamental Surplus
y-z
Reservation Wage - z
Vacancy Creation
Vacancy Creation
Opening a vancancy incurs an ongoing cost to the firm
These costs are paid using the fundamental surplus
More vacancies lead to more jobs lower unemployment
Transition Mechanism
v
y-z
y
unemployment
u
It's all about sensitivity though
The elasticity of unemployment with respect to productivity
Depends on the fraction of productivity that can be allocated to job creation (Fundamental Surplus Fraction)
y Z
y
Fundamental suplus fraction
The fundamental surplus doubles
The number of vacancies double
The fundamental surplus increases by half
The number of vacancies increase by half
Less is more
Unemployment is more sensitive to changes in productivity when the fundamental surplus fraction is small
Context
Empirically, there are large fluctutations in unemployment accross the business cycle
Ljungqvist and Sargent's paper allows for a better understanding of these fluctutations
Context
Europe Vs America
Europe Vs America
European countries tend to have more generous unemployment benefits and layoff taxes
These policies reduce the fundamental surplus
America
Europe
Unemployment benefits
Literature Review
Hall - Sticky Wages
Wassmer and Weil - Credit Market Imperfections
Literature Review
Hall
Hall
Hall adds a Wage norm that is fixed in the short run - essentially sticky
Deviation from the wage norm
Key Equations:
Wage norm in excess of reservation wage
Wassmer and Weil
Wassmer and Weil
Two Markets - Credit and Labour Markets
For a Job to be created two matches must occur:
Employee meets a Employer
Entreprenuer meets a financier
Both incur search costs
Credit Market Search Costs
Strengths
and
Weaknesses
Strengths
Strengths
Correctly identify the mechanism between productivity and unemployment
- Hall (2005)
Introduces sticky wages (w)
- Wasmer and Weil (2004)
Introduces sticky wages (w) and credit search costs (k)
- Hall and Milgrom (2008)
Introduce bargaining between the firm and the worker prior to employment
- Pissarides (2009)
Adds a fixed costs to matching with a worker
Weaknesses
Weaknesses
How can you measure fundamental surplus?
The reservation wage cannot be observed
y
Productivity is heterogenous across both industries and workers
Z
The Goods Market Matters Too
The model predicts unemployment benefits to reduce fundamental surplus
This ignores the impact unemployment has on consumer demand:
Consumer Demand
Benefit
Price
Productivity
The internet
The advent of internet based job searching should have increased match efficiency
Lower unemployment
Is not empirically observed but predicted by the model
Are the findings still valid?