Search Unemployment
Search unemployment is unemployment that arises from the time and resources required for workers to find suitable jobs and for firms to find suitable workers. It is a form of frictional unemployment, reflecting the frictions inherent in matching heterogeneous workers to heterogeneous jobs.
The Matching Process
The labour market is characterised by heterogeneity: workers differ in skills, preferences, and location, and jobs differ in requirements, wages, and working conditions. Matching is a process of search, in which workers and firms expend resources to find suitable partners.
Search takes time, and during the search workers are unemployed. The resulting unemployment is not a sign of market failure in the usual sense but a consequence of the frictions that characterise the labour market. The level of search unemployment depends on the efficiency of the matching process and on the incentives to search.
The Beveridge Curve
The Beveridge curve depicts the relationship between the unemployment rate and the vacancy rate. Points along the curve represent different states of the labour market, with higher unemployment associated with lower vacancies. The position of the curve reflects the efficiency of matching, and shifts in the curve indicate changes in matching efficiency.
A shift outward, with higher unemployment for a given vacancy rate, indicates a deterioration in matching efficiency, which may reflect skills mismatch, geographic mismatch, or reduced search intensity. Movements along the curve reflect cyclical conditions, with unemployment falling and vacancies rising in expansions.
The Matching Function
The matching function describes the number of matches formed as a function of the number of unemployed workers and the number of vacancies. It captures the efficiency of the matching process and underpins models of search and matching, including the Diamond-Mortensen-Pissarides framework.
These models analyse the determinants of unemployment and vacancies, the effects of policy on the matching process, and the welfare properties of equilibrium. They inform the analysis of labour market policy, including unemployment insurance and active labour market programmes.
Policy Implications
Search unemployment has implications for policy. Unemployment insurance affects search behaviour, since more generous benefits may reduce the urgency of finding work and lengthen the duration of unemployment. The design of benefits must balance the provision of insurance against the incentive to search.
Active labour market policies, including job search assistance, training, and placement services, aim to improve the efficiency of matching and to reduce the duration of unemployment. Their effectiveness varies, and the design of programmes must be tailored to the characteristics of the labour market and of the workers they serve.
Diamond-Mortensen-Pissarides Framework
The Diamond-Mortensen-Pissarides framework analyses the labour market as a process of search and matching. Workers search for jobs, firms post vacancies, and matches are formed according to a matching function. Wages are determined by bargaining, and the equilibrium involves a positive level of unemployment, reflecting the frictions in the matching process.
The framework, for which the authors received the Nobel Prize, provides a rigorous account of equilibrium unemployment and of the effects of policy. It analyses the determinants of vacancies, of the duration of unemployment, and of the efficiency of the equilibrium, and it informs the assessment of labour market policy.
Job Creation and Destruction
The framework distinguishes job creation, the posting of vacancies and the formation of matches, from job destruction, the separation of workers from jobs. The flows of creation and destruction determine the level of employment and unemployment, and the analysis of these flows informs the understanding of labour market dynamics.
Policies affect both creation and destruction. Excessive firing costs may reduce destruction but also discourage creation, since firms anticipate the cost of eventual separation. The design of employment protection must balance the benefits of stability against the costs of reduced flexibility.
Efficiency of Equilibrium
The search and matching framework identifies conditions under which the equilibrium level of unemployment is efficient and conditions under which it is not. Because of the externalities involved in search, including the effects of additional search on the probability of matching, the equilibrium may involve too much or too little unemployment.
The analysis of these externalities informs the assessment of policy. Policies that affect search incentives or the efficiency of matching can improve outcomes, and the design of unemployment insurance and of active labour market policy must account for the externalities involved.
Empirical Applications
The framework is applied empirically to analyse the effects of unemployment insurance, of labour market regulations, and of shocks on unemployment and vacancies. The Beveridge curve, relating unemployment and vacancies, is a central empirical tool, and shifts in the curve are interpreted as changes in matching efficiency.
The empirical work informs the assessment of policy and the understanding of labour market dynamics. It also highlights the importance of the matching process and of the frictions that characterise the labour market for the analysis of unemployment and of the effects of policy.