Chapter 18 - Unemployment: causes and consequences. The main contents of this chapter include all of the following: Types of unemployment, wage rigidity, voluntary unemployment, imperfect information, unemployment insurance. | Chapter 18 Unemployment: Causes and Consequences Created by: Erica Morrill, Fanshawe College © 2002 McGraw-Hill Ryerson Ltd. Chapter Focus Types of unemployment Wage rigidity Voluntary unemployment Imperfect information Unemployment insurance Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Types of Unemployment Frictional Structural Demand-Deficient Seasonal Involuntary (associated with wage rigidity) Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Search Unemployment Imperfect information on both sides of the labour market Undertaking a job search has costs and benefits determine if it is worthwhile to initiate the job search determine when to discontinue Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Optimal Job Search Marginal expected benefit equals marginal expected cost Diminishing returns Duration - less likely a better offer will be received “Stopping Rule”- minimum acceptable wage Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Figure Optimal Job Search Search . | Chapter 18 Unemployment: Causes and Consequences Created by: Erica Morrill, Fanshawe College © 2002 McGraw-Hill Ryerson Ltd. Chapter Focus Types of unemployment Wage rigidity Voluntary unemployment Imperfect information Unemployment insurance Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Types of Unemployment Frictional Structural Demand-Deficient Seasonal Involuntary (associated with wage rigidity) Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Search Unemployment Imperfect information on both sides of the labour market Undertaking a job search has costs and benefits determine if it is worthwhile to initiate the job search determine when to discontinue Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Optimal Job Search Marginal expected benefit equals marginal expected cost Diminishing returns Duration - less likely a better offer will be received “Stopping Rule”- minimum acceptable wage Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Figure Optimal Job Search Search duration Present value of total costs and expected total benefits Se Search duration Present value of MC and expected MB Se C B MC MB Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Figure Wage Distributions Under Imperfect and Perfect Information Wage rate Number of Jobs WA Wage rate Number of Jobs We Imperfect Information Full Information Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Factors Determining Optimal Search Wage offers and duration of job Increase in benefits/decrease in costs Dissemination of information Vacancies/offers Value of leisure/# of other searchers Social and labour market policies Aggregate economic conditions Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Implicit Contracts Firms and workers are already engaged in employment relationship Explains responses to changes in production demand rigid wages layoffs/rehires Reflects risk-sharing Chapter 18- © 2002 McGraw-Hill Ryerson Ltd. Implicit Contract Theory Employees purchase income insurance from the .