mathsperts7 - V u = 1 r r& r s b pw r s p& d ±(iii...

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Economics for Mathsperts VII Consider the same framework as described in Mathsperts VI, but now the probability an unemployed worker gets a job depends on the e/ort he±she makes p while a discouraged job seeker who makes no e/ort of getting a job always remains unemployed. (i) Explain why the discouraged job seeker has value of employment W u given by W u = b + 1 1 + r W u and so W u = (1 + r ) b=r: (ii) Explain the following value functions for an active job seeker, where d describes the disutility of both looking for work and working full time (e.g. foregone time spent in the pub). V u = b d + 1 1 + r [ pV e + (1 p ) V u ] V e = w d + 1 1 + r [(1 s ) V e + sV u ] : Solve these equations for V u ; V e and so establish:
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Unformatted text preview: V u = 1 + r r & ( r + s ) b + pw r + s + p & d ± (iii) Explain why an unemployed individual will only look for a job if V u ± W u : Suppose b < w & d and show an unemployed worker will actively look for work only if the probability of &nding work is large enough; i.e. when p > ( r + s ) d w & b & d : Explain how job seeker incentives depend on (a) the probability of &nding work p; (b) social security bene&t b; (c) the typical wage o/er w; (d) how long the job is likely to last; (e) outside leisure opportunities d: (iv) Will anybody look for work if bene&t b > w & d ? Think about it - why is the condition in (iii) wrong when b > w & d ? 1...
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This note was uploaded on 12/31/2011 for the course ECON MR 102 taught by Professor Huyduong during the Winter '11 term at RMIT Vietnam.

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