EC9900
May Examinations 2020/21
Topics in Applied Macroeconomics
Section A: Answer ONE question
1.
(a) Consider a version of the Diamond-Mortensen-Pissarides model with matching function:
where u and v respectively denote the unemployment and vacancy rates, γ is the elasticity of matches with respect to the unemployment rate and M is a parameter representing matching efficiency. Let 
denote labour-market tightness.
(i) Write expressions for the job-finding and job-filling rates in terms of tightness. (4 marks)
(ii) Let λ denote the job-separation rate. Derive an expression for the steady-state rate of unemployment in terms of tightness (the theoretical “Beveridge curve”) (4 marks)
In addition, the job-creation equation and the wage equation for the model are given by:
where q(θ) denotes the job-filling rate as a function of tightness (derived in part (i) above) and further parameters and variables are defined as follows:
r: interest rate
p: flow product of a job-match
c: firm’s flow cost of posting a vacancy (as fraction of p)
z: flow utility from unemployment
β: workers’ bargaining power
w: flow wage
(iii) Sketch a graph demonstrating how tightness, wages and the unemployment rate are determined in steady state. (5 marks)
(iv) Consider an exogenous increase in M, the matching efficiency. Show how this affects the steady-state equilibrium of the model. Explain intuitively. (12 marks)
(b) Explain what is meant by time aggregation problem in the context of the measurement of job-finding and job-separation probabilities (rates). How may time aggregation affect the measured transition probabilities? (7 marks)
(c) Describe the key empirical regularities in the long-run evolution of unemployment rates in OECD economies over the decades prior to the Great Recession. Discuss briefly how Ljungqvist and Sargent (1998) explain key aspects of the observed trends. (18 marks)
Section B: Answer ONE question
2.
(a) Answer EITHER (i) OR (ii): (25 marks)
EITHER
(i) Are high-productivity or low-productivity firms responsible for the UK’s productivity problem?
OR
(ii) Some commentators contend that increased labour supply through migration can explain changes in productivity and wages in the UK since the start of this century. Do you agree? EC9900
(b) Answer EITHER (i) OR (ii): (25 marks)
EITHER
(i) Can capital-skill complementarity explain changes in wages and employment over recent decades?
OR
(ii) Can routine-biased technical change explain changing employment structures over the last decades? Your answer should include discussion of empirical evidence.