In the two-sided search model, an increase in productivity causes
A) the vacancy rate and the unemployment rate to fall.
B) output to fall and the vacancy rate to fall.
C) labour market tightness to fall and output to fall.
D) labour market tightness to rise and output to fall.
E) the vacancy rate to rise and the unemployment rate to fall.

Question

Quizplus · Accepted Answer

In the two-sided search model, an increase in productivity leads to an increase in the number of firms looking to hire workers (i.e., an increase in vacancies) and also an increase in the number of workers searching for jobs. As a result, the vacancy rate and the unemployment rate both initially increase. However, as workers find jobs and vacancies are filled, the unemployment rate eventually falls while the vacancy rate rises. Therefore, the correct choice is E, which states that an increase in productivity causes the vacancy rate to rise and the unemployment rate to fall.

In the Two-Sided Search Model, an Increase in Productivity Causes