Macro-economists are usually interested in the following questions. How are aggregate labour market outcomes: unemployment, job vacancies, and employment determined as equilibrium phenomena? Why do unemployed workers and unfilled vacancies coexist?
Suppose that the government can operate ๐บ firms, subject to the same constraints as private firms. The government also incurs the same cost (๐) to post a vacancy and pays the same wages (๐ค) as private firms. Discuss the possible effects of ๐บ on the labour market tightness, the labour force, the number of private firms and the aggregate output in the economy.
Use the Diamond-Mortensen-Pissarides (DMP) model to answer the above questions. [50 marks]
Note: Use equations and graphs in your answer ONLY if you want to use them.
