2. (30 points) Consider our search model of unemployment. Denote V, the value of an unemployed worker, Ve(w) the value of an employed worker with a wage offer w, H(w) the fraction of job offer wages above w, s the separation rate, p the job offer rate, and U the unemployment rate. Unemployed workers receive some benefit b when unemployed (which lasts until the unemployed worker starts working). Assume all workers are identical. (a) (15) Assume that at date t the unemployment rate is Ur. State an equation that dictates the evolution over time of the unemployment rate (i.e., Ut+1 as a function of U). Solve for the steady-state unemployment rate in this economy as a function of the reservation wage w* and exogenous parameters. (b) (15) Compared to the U.S., European countries tend to have higher unemploy- ment benefits, higher wage-income taxes, and higher unemployment rates. Using graphs, show how these outcomes are consistent with the predictions of the search model of unemployment. Clearly state any assumptions you make. 2. (30 points) Consider our search model of unemployment. Denote V, the value of an unemployed worker, Ve(w) the value of an employed worker with a wage offer w, H(w) the fraction of job offer wages above w, s the separation rate, p the job offer rate, and U the unemployment rate. Unemployed workers receive some benefit b when unemployed (which lasts until the unemployed worker starts working). Assume all workers are identical. (a) (15) Assume that at date t the unemployment rate is Ur. State an equation that dictates the evolution over time of the unemployment rate (i.e., Ut+1 as a function of U). Solve for the steady-state unemployment rate in this economy as a function of the reservation wage w* and exogenous parameters. (b) (15) Compared to the U.S., European countries tend to have higher unemploy- ment benefits, higher wage-income taxes, and higher unemployment rates. Using graphs, show how these outcomes are consistent with the predictions of the search model of unemployment. Clearly state any assumptions you make