London School of Economics
ECONOMICS EC1B3
ย EC1B3 Problem Set 7 due on Sunday at 6 PM Important: if you have any doubts about the exercises, please post a question on Piazza. Learning outcomes: - Labour market flows dynamic - Labour market institutions and unemployment: the main facts Question 1 There are two countries that are identical in every respect, except in their sep
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EC1B3 Problem Set 7 due on Sunday at 6 PM Important: if you have any doubts about the exercises, please post a question on Piazza. Learning outcomes: - Labour market flows dynamic - Labour market institutions and unemployment: the main facts Question 1 There are two countries that are identical in every respect, except in their separation and job finding rates. Country A has ๐ = 0.02 and ๐ = 0.38. Country B has ๐ =0.01 and ๐ = 0.19. a. Calculate the natural unemployment rate for both countries. For country A, we have ๐ข๐ด = 0.02 0.02+0.38 = 0.05 or 5%. For country B we get ๐ข๐ต = 0.01 0.01+0.19 = 0.05 b. What labour market institution can affect the labour market flows in this way? Explain. The difference in separation and job finding rates in the two countries is most likely due to differences in their employment protection legislation (EPL). The evidence suggests that EPL reduces the separation rate, as it reduces the number of people getting fired, but also reduces the job finding rate as firms are reluctant to hire new workers if it is difficult to get rid of them if they are not a good match. Assume now that country A wants to make their labour market more flexible and introduces a new form a labour contract. This new contract is such that you can more easily fire workers, and it is designed for low skilled workers. Assume the fraction of workers that are low skilled is ๐ = 0.6. The old contract type has the separation and job
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