Economics 4311: Labor Economics
Professor Cory Koedel
Fall 2009
Problem Set #7
Unemployment
1. Why is the reported unemployment rate likely to understate true unemployment?
2. Name and understand the four types of unemployment.
3. The concept of positive self image is most likely to increase which type of
unemployment?
4. Explain the moral hazard problem with unemployment insurance.
5. The unemployment insurance system is imperfectly experience rated for firms. What
does this mean? How is UI susceptible to moral hazard because of its imperfect
experience rating?
6. Why is the long-run Philip’s curve vertical?
7. John has the following marginal revenue and marginal cost functions of job search:
MR = 50 – (3/2)*W
MC = 5 + W
Here, W is the wage offer in hand.
a) Why is the marginal revenue function decreasing in W?
Because as W increases, it is less likely that John’s search will yield a higher wage than W. Thus,
he has less to gain from his search as his in-hand offer increases.
b) What wage will the worker ask for in this case?
Set MR = MC:
W* = $18
c) Suppose that UI benefits decline so that the marginal cost of job search rises to MC =
20 + w. What is the new asking wage? If UI benefits declined universally, what
would you expect to happen to the unemployment rate? Which type of
unemployment will be most affected?
Set MR= MC:
W* = 12
Unemployment DOWN, frictional unemployment down.
8. Consider two unemployed workers that are identical in every way except that one
worker is 25 years old and the other is 50. Based on search theory, which worker will
be unemployed longer? Why?
The younger worker will be unemployed longer. Higher returns to a better match.
9. How would an increase in unemployment insurance benefits undermine a firm paying
efficiency wages?