Consider a small island economy in which almost all jobs are in the tourism industry. A law is passed mandating that all workers in the tourism industry be paid the same national hourly wage, even though workers differ in their skills and effort. In fact, some workers simply cannot produce enough output to be worth the national wage.
(a) How will a worker's optimal job search strategy differ from that discussed in the text? What is the essential difference between this example and the general case discussed in the text?
(b) Despite the law, workers become more productive with experience. How might firms compete over workers when all workers must be paid the same wage?
(c) After the law has been enforced for several years, an economist looks at the data and finds that the duration of unemployment spells is significantly longer when unemployment rates are low and significantly shorter when unemployment rates are high. How can this behavior be explained?