Question

According to search and matching theory, an improvement in the efficiency of the matching process will decrease both unemployment and unfilled vacancies in the long run equilibrium.

Please evaluate the statement as either TRUE,FALSE or UNCERTAIN. Please illustrate your answers with diagrams and/or algebra when appropriate.

Answer 1

False The workers and firms depends on the income of each if they unmatched to locate alternative partners if the negotiation failed. The unmatched alternatives were affected by the imbalance of labour market. If the number of vacancies per unemployed worker increases, they demanded for high wages. The firms are willing to pay this wage to avoid the time need to hire another worker. The outside workers will accept the low wages to avoid long term unemployment. As the number of vacancies increased, the wage rate will increase. If there is an improvement in the efficiency will decrease the unemployment and filled the vacancies in long run equilibrium. Vacancy Vacancy Wage setting V* Beveridge curve Vacancy supply W* U* Unemployment rate From the first section of figure, the wage setting curve is upwards sloping shows that the wage will increase with number of vacancies. The wage rate fixed at W* where the vacancy supply and the wage rate intersect. The unemployment level is depicted in the next section. Beveridge curve shows the relation between unemployment rate and the number of vacancies. As vacancy increased the unemployment will fall down.