Question

Suppose that all social programs simultaneously become more generous. In particular suppose that there is an increase in UI benefits, and also an increase in welfare benefits, which are represented in the DMP model as payments to everyone who is not in the labor force. What will be the effects on the unemployment rate, the vacancy rate, the labor force, the number of firms, the aggregate output, and the labor market tightness? Explain your results.

Answer 1

• Increase in unemployment
• Increase in vacancy rate
• Decrease in labor force
• Decrease in # of labor firms
• Tightening of the labor forces