Tuesday, September 30, 2014

A backward-bending job search intensity supply curve for modeling the labor market

Unemployed on a job search at Watford labor exchange. Russavia
We expect the unemployment rate to increase in a recession and the opposite when the economy improves. Yet, during an expansion, some non-employed persons do not seem to be looking for a job, or are slack about doing so. It would be insightful to understand the search efforts or intensity of search the unemployed employ faced with improving economic conditions. As with employment, search efforts are complements to labor market conditions. At expansions, we expect an increase in search efforts and vice versa in recessions. But to what degree? Wealth and risk aversion also influence search efforts. In a model of job search intensity in relation to labor market conditions, the evidence is undeniable that labor market conditions, risk aversion, wealth and job search methods does influence job search intensity.

In classical economics, there is a backward-bending labor supply curve that models choices made between working and leisure time. According to the curve, at low wage rates, increased wages lead people to work more and at higher wage rates, people work less, substituting leisure for work. Because job search and job-finding rates are related to macroeconomic conditions, many researchers have desired to understand if an association exists. In standard search models, workers’ search intensity is procyclical but recent models seem to debate otherwise, asserting that workers’ search intensity should be acyclical. Let’s assume our job search intensity is based on increased expected income and an accompanying increase in expected consumption. If a rational person thinks that looking for and getting a job will increase his income and hence, his consumption, he’d tend to be more energetic in finding one. Let’s also make an allowance for the procyclical and acyclical arguments and assume that labor market conditions (meaning macroeconomic conditions) can either have a positive impact on the job search effort or none at all. According to Jeremy Schwartz of Loyola University, Maryland, USA, what we’ll have as a result is a backward-bending job search intensity supply curve.
Job search intensity curve as depicted in the study by Jeremy Schwartz
As you can see from the graph, there are two parts to the graph, the lower half and the upper half. At the lower half, the procyclical debate prevails - as labor market conditions improve, we’d expect an increase in job search intensity and in the upper half, a countercyclical argument comes into play – as labor market conditions improve, workers tend to substitute leisure for work and are hesitant to put much effort in looking for a job. The shift in the curve favors the acyclical debate that labor market conditions and job search intensity have no association or relation.
  • Labor market conditions have a positive relation to job search intensity.

  • This is similar to the classical substitution effect. As labor market conditions improve, job search effort is expected to have a greater impact on expected income and the opportunity cost of not searching increases, therefore workers substitute away from leisure towards job searching. This is the bottom half in the figure above. Labor market conditions and job search intensity are complements in the job search process. Job search intensity is procyclical. This is the condition that dominates in most cases when the economy improves. The labor force participation rate (LFPR), the ratio of the labor force to the civilian population, is procyclical. When counting the average number of job search methods employed by the unemployed in looking for a job, this measure was also found to be procyclical.

  • Labor market conditions have a negative relation to job search intensity.

  • This is similar to the classical income effect. As the economy improves and the probability of finding a a job increases, workers’ bargaining power increases and firms are forced to increase wages. This increase in expected income and expected consumption decreases the search effort as workers focus more on leisure activities. This relation is also found to favor the wealthy. In this situation, labor market conditions and job search intensity are substitutes. This countercyclical behavior though is found of minor importance when compared to the job search procyclical behavior.

  • Labor Market conditions and the job search intensity appear to show no evident relation.

  • When you look at the graph, the shift in the curve from S1 to S2 represents a shift in workers’ risk attitudes from risk seeking to risk aversion. At any given labor market condition, greater risk aversion results in higher levels of job search effort. Also, less wealthy risk averse individuals have greater job search efforts than their more wealthy counterparts.

This model of the labor market is quite interesting because it attempts explaining all cases of job search behavior which will greatly improve policies like unemployment insurance and other policies that reduce the unemployment rate and/or increase social welfare.

Finally, Schwartz’s study on the procyclical nature of job search methods found that sending out resumes and looking at advertisements have the lowest opportunity cost on effecting an exit from unemployment while contacting placement centers, unions and schools have the lowest impact.

You can find and download the full study online: The Job Search Intensity Supply Curve: How Labor Market Conditions Affect Job Search Effort.

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