According to the two-sided search model, in equilibrium labour market tightness tends to be high when
A)profits are close to zero.
B)the cost of a vacancy is high relative to the firm's share of the surplus.
C)the firm's share of the surplus is high relative to the cost of a vacancy.
D)employment insurance benefits are high relative to the productivity of a match.
E)the firm's share of the surplus is increasing in market tightness.

Question

Quizplus · Accepted Answer

In the two-sided search model, the cost of a vacancy refers to the cost of leaving a job unfilled while the firm searches for a suitable employee. When the firm's share of the surplus (the value of the worker's output minus the cost of hiring and retaining the worker) is high relative to the cost of a vacancy, the firm has a greater incentive to search for a better match, leading to a higher labour market tightness. Therefore, choice C is the best answer.

According to the Two-Sided Search Model, in Equilibrium Labour Market