mathsperts6 - Economics for Mathsperts VI The following...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics for Mathsperts VI The following describes the shirking model of unemployment. Suppose each month an unemployed worker gets a job with probability p while an employed worker loses his/her job with probability s: Suppose unemployed workers receive b wage w: In a baby model we assume steady state so that nothing changes over time at the aggregate level. 1. Let V u describe expected discounted earnings while unemployed, V E de- scribe expected discounted earnings while employed and so are given by: V u = b + 1 1 + r [ pV E + (1 p ) V U ] V E = w + 1 1 + r [ sV U + (1 s ) V E ] : Solve for V U ; V E : 2. People are lazy and will only work hard if the value of being employed is su¢ ciently high; i.e. V E V U ± k where k describes the disutility of having to w to the point where V E V U = k: Solve for this wage w and show: w = b + r + s + p 1 + r k: Explain why this wage mark-up increases with
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.
Ask a homework question - tutors are online