Question

Question 3. Describe the search unemployment model, including a graphical analysis for optimal job search.

Answer 1

the search model consists of three elements and each element comprise the different aspect of the labor market. A combination of these elements determines the overall labor market.

the three elements are as:

1) how wages are set:

In most of the labor markets, wages are determined by the bargaining process between workers and employers. The bargaining process depends on bargaining power and outside options of each party. In cases where wages are set differently than bargaining, the wage setting process depicts an inverse relationship between the number of vacancies and unemployment rate. As vacancies increase workers get higher wages.

2)

Opening job vacancies; Firms will keep hiring additional worker till marginal productivity of each added worker is greater than market wages. But hiring workers is costly and time-consuming which is explained in the vacancy supply curve where the number of vacancies is determined as a function of market wage and recruiting costs.

3)

Match the workers and jobs; the wage setting curve and vacancy supply curve determine the wages and number of vacancies opened by firms. All these factors are not independent of one another and help in determining how unemployment rate gets affected by labor market frictions.

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