"Why Can't the Long-Term Unemployed Find Jobs? A Possible Explanation and Dynamic Implications", MSc thesis, London School of Economics, 1986 (MSc Econometrics and Mathematical Economics).

MSc thesis, London School of Economics, 1986 (MSc Econometrics and Mathematical Economics). Advisor: Prof. John Moore. It is a feature of most labour markets that firms are unable to determine the precise characteristics (skills) of unemployed workers without incurring considerable costs. Firms which want to hire workers are thus induced to "exploit" any signal which can inform them about the likelihood that particular unemployed workers meet their skill requirements before incurring these costs. Workers who meet the requirements of a high proportion of firms are likely to be the first to leave unemployment: the duration of unemployment spells is thus an "informative signal" which firms can use when evaluating job applicants. In section 2 of this essay, we show that this may lead firms to disregard job applications made by workers whose unemployment spell exceeds a "cut-off" duration. In section 3 we show that the existence of such a "cut-off" duration affects the dynamic characteristics of the economy: it leads to an asymmetry in its adjustment to positive as opposed to negative productivity shocks; furthermore increases in the amplitude of these shocks (holding constant their mean and their frequency) influence the average employment level (we identify a condition under which an increase in the amplitude of productivity shocks raises average employment); increases in their frequency (holding constant their amplitude and their mean) reduce the amplitude of the fluctuation of employment ("inertia"). Employment exhibits serial correlation: a one-time productivity shock leads to an adjustment path which extends over several periods. The model developed in this essay is an equilibrium model (the wage rate is fully flexible). The serial correlation result is obtained even in the absence of misperception, i.e. even for perfectly anticipated shocks and although there are no costs of adjustment.