a and b II. Suppose that the Phillips curve is given byTH - T-1 = -a(u, – Un)whereUn = (m + z)/aRecall that this Phillips curve was derived under the assumption that the wage-bargainingequation took the formW = p° (1 – au + z)We can think of a as a measure of wage flexibility-the higher a the greater the response ofwage to a change in the unemployment rate, uț.a. Suppose m = 0.03 and z = 0.04. What is the natural rate of unemployment if a = 1? ifa = 2? What is the relation between a and the natural rate of unemployment? Interpretyour answer.A reduction in the bargaining power of workers may have something to do with theeconomy's relatively mild response to the increases in oil prices in the past few years ascompared to the economy's response to increases in oil prices in the 1970s. Onemanifestation of a reduction in worker bargaining power could be an overall increase in wageflexibility (i.e., an increase in a).b. Suppose that as a result of an oil price increase, m increases to 0.06. What is the newnatural rate of unemployment if a = 1? if a = 2? Would an increase in wage flexibilitytend to weaken the adverse effect of an oil price increase?

II. Suppose that the Phillips curve is given by TH - T-1 = -a(u, – Un) where Un = (m + z)/a Recall that this Phillips curve was derived under the assumption that the wage-bargaining equation took the form W = p° (1 – au + z) We can think of a as a measure of wage flexibility-the higher a the greater the response of wage to a change in the unemployment rate, uț. a. Suppose m = 0.03 and z = 0.04. What is the natural rate of unemployment if a = 1? if a = 2? What is the relation between a and the natural rate of unemployment? Interpret your answer.

II. Suppose that the Phillips curve is given by TH - T-1 = -a(u, – Un) where Un = (m + z)/a Recall that this Phillips curve was derived under the assumption that the wage-bargaining equation took the form W = p° (1 – au + z) We can think of a as a measure of wage flexibility-the higher a the greater the response of wage to a change in the unemployment rate, uț. a. Suppose m = 0.03 and z = 0.04. What is the natural rate of unemployment if a = 1? if a = 2? What is the relation between a and the natural rate of unemployment? Interpret your answer.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter21: Unemployment

Section: Chapter Questions

Problem 43CTQ: Is it desirable to eliminate natural unemployment? Why or why not? Hint: Think about what our...

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Is it desirable to eliminate natural unemployment? Why or why not? Hint: Think about what our economy would look like today and what assumptions would have to be met to have a zero rate of natural unemployment.
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Suppose that all social programs simultaneously become more generous. In particular suppose thatthere is an increase in UI benefits of $500, and also an increase in welfare benefits of $500, whichare represented in the two-sided search model as payments to everyone who is not in the labor force.What will be the effects on• the unemployment rate, U ,• the vacancy rate, v,• the labor force, Q,• the number of firms, A,• aggregate output, Y , and• labor market tightness, j ≡ A/Q?
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The college graduates of 2000 could hardly have asked for better luck. The unemployment ratedropped to 4.1 % in May 2000- roughly, the lowest level in a generation- and employers wereliterally scrambling for new hires. Starting salaries rose, many graduating seniors had numerousjob offers, and some firms even offered $10,000- $20,000 bonuses to students who signed thedotted line. Three years later, the job market for the Class of 2003 was rather different. U.S. economic growth had slowed to a crawl, and then to a halt. Companies that had stocked up on recent college grads in the tighter labour markets of 1998-2000 found themselves with more than they knew what to do with in 2002 and 2003. They were not eager to hire more. Bonuses and other “perks” disappeared; job offers became scarcer. With the unemployment rate around 6% in May and June of 2003, the job market was far from the worst ever. But it was nothing like the glory days of 2000. Discussion:(i) Briefly explain and justify…