FOUR COMPARATIVE STEADY-STATE EXERCISES USING THE DIAMOND-MORTENSEN-PISSARIDES MODEL

EMPIRICAL- AND POLICY-DRIVEN APPLICATIONS FOR FIRST-YEAR GRADUATE STUDENTS IN MACROECONOMICS

Authors

  • Michael B. Loewy

Keywords:

two-sided labor market search, comparative steady-state exercises, graduate teaching

Abstract

The Diamond-Mortensen-Pissarides (DMP) model of two-sided labor market search is now a common topic in first-year graduate courses in macroeconomics. Following Pissarides (2011), Alogoskoufis (2019) derives a two-equation in two unknowns solution to the DMP model that is useful for teaching this topic. I discuss four comparative steady-state exercises that he does not consider: (i) a direct change in the posting price of a vacancy; (ii) a change in labor-market matching efficiency; (iii) financing unemployment benefits that are proportional to the real wage with a labor income tax; and (iv) the addition of a minimum wage. The first two exercises are empirically motivated, and the second two exercises are policy motivated.

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Published

2023-03-29 — Updated on 2023-04-03

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