Economics of Search

The economics of search study the implications of frictions for individual behavior and market performance, due usually to imperfect information about exchange possibilities. This article reviews labor-market research in this area. Individuals search for a job offer by choosing a reservation wage and accepting jobs that pay above that wage. Firms create jobs to maximize profit. The probability of realizing a match is derived from an aggregate matching function that gives the number of jobs formed in terms of the search efforts of firms and workers. Because of monopoly rents implied by frictions, wages are determined either by bargaining or by take-it-or-leave it offers posted by firms. Bargaining models share the surplus and give rise to a single wage for homogeneous labor that in general does not allocate jobs efficiently. Wage posting can give rise to a single wage equal to the worker’s reservation wage if the worker can only observe one wage offer at a time, or to the efficient allocation if posted wages can be observed but there are job queues, or to a distribution of wage offers if employed workers can sample more than one firm at a time. Job destruction is due either to job-specific shocks or to technological obsolescence. The economics of search study the implications of market frictions for economic behavior and market performance. “Frictions” in this context include anything that interferes with the smooth and instantaneous exchange of goods and services. The most commonly-studied problems arise from imperfect information about the location of buyers and sellers, their prices and the quality of the goods and services that they trade. The key implication of these frictions is that individuals are prepared to spend time and other resources on exchange; they search before buying or selling. The labor market has attracted most theoretical and empirical interest in this area of research, ∗Forthcoming in Encyclopedia of the Social and Behavioral Sciences, Elsevier.

[1]  Scott D. Schuh,et al.  Job Creation and Destruction , 1997 .

[2]  John Joseph McCall,et al.  The Economics of Information and Uncertainty , 1982 .

[3]  Nicholas M. Kiefer,et al.  Empirical Labor Economics: The Search Approach. , 1992 .

[4]  Philippe Aghion,et al.  Growth and Unemployment , 1991 .

[5]  P. Diamond A model of price adjustment , 1971 .

[6]  C. A. Pissarides,et al.  Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages , 1985 .

[7]  Jonathan S. Leonard In the Wrong Place at the Wrong Time: The Extent of Frictional and Structural Unemployment , 1986 .

[8]  C. Pissarides,et al.  Looking into the black box: a survey of the matching function , 2001 .

[9]  Arthur J. Hosios,et al.  On The Efficiency of Matching and Related Models of Search and Unemployment , 1990 .

[10]  Dale T. Mortensen,et al.  The Matching Process as a Noncooperative Bargaining Game , 1982 .

[11]  Manfred Kochen,et al.  On the economics of information , 1972, J. Am. Soc. Inf. Sci..

[12]  C. A. Pissarides,et al.  Equilibrium Unemployment Theory , 1990 .

[13]  Edmund S. Phelps,et al.  Microeconomic Foundations of Employment and Inflation Theory. , 1972 .

[14]  Larry Samuelson,et al.  Plant Turnover and Gross Employment Flows in the U.S. Manufacturing Sector , 1989, Journal of Labor Economics.

[15]  J. McCall Economics of Information and Job Search , 1970 .

[16]  Dale T. Mortensen,et al.  Job Creation and Job Destruction in the Theory of Unemployment , 1993 .

[17]  Ricardo J. Caballero,et al.  The Cleansing Effect of Recessions , 1991 .

[18]  C. Pissarides Efficient Job Rejection , 1984 .

[19]  Harold L. Cole,et al.  Can the Mortensen-Pissarides Matching Model Match the Business Cycle Facts?" International Economic , 1999 .

[20]  J. Montgomery Equilibrium Wage Dispersion and Interindustry Wage Differentials , 1991 .

[21]  A. Rubinstein,et al.  The Nash bargaining solution in economic modelling , 1985 .

[22]  Dale T. Mortensen,et al.  Wage Differentials, Employer Size, and Unemployment , 1998 .

[23]  Rafael Rob,et al.  Equilibrium Price Distributions , 1985 .

[24]  Espen R. Moen Competitive Search Equilibrium , 1997, Journal of Political Economy.

[25]  E. Phelps Microeconomic Foundations of Employment and Inflation Theory , 1970 .

[26]  Peter A. Diamond,et al.  Wage Determination and Efficiency in Search Equilibrium , 1982 .

[27]  A. Oswald,et al.  The Wage Curve , 1989 .

[28]  C. Pissarides,et al.  Job Reallocation, Employment Fluctuations and Unemployment , 1999 .

[29]  Peter A. Diamond,et al.  The Cyclical Behovior of the Gross Flows of U.S. Workers , 1990 .