Simultaneous Search: Between Search and Walras
32 Pages Posted: 14 Apr 1997
Date Written: January 1997
We present a general equilibrium model in which unemployed workers search for employment opportunities. We deviate from the traditional search and matching literature by allowing each worker to simultaneously sample a number of firms; exogenously given, this number is a natural proxy for labor market information available to workers. As it approaches infinity, the information nears completeness, and our setup converges to the Walrasian one, with the equilibrium converging as well. On the other hand, as the number of searches declines, a traditional search model emerges with with the standard results. Thus, our model nests the conventional search models and the Walrasian model, which enables us to move between the two paradigms by varying the number of searches. We show that for a sufficiently large number of searches there exists an equilibrium such that each firm offers the same wage which is equal to the marginal productivity of labor. At the same time the model predicts involuntary unemployment at this wage. The aggregate employment in this model is determined by demand factors and by the level of information available to workers. On the other hand, wages are determined solely by technology and the exogenously given price of capital. This feature of the model leads to empirical predictions that are consistent with stylized facts but are hard to replicate using the Walrasian setup. In particular, changes in the variability of demand shocks can reduce employment without affecting wages, whereas technological changes can affect wages without altering the level of employment. Thus, our economy generates co-movements of wages and employment that could be interpreted as reflecting wage rigidities. Another empirical prediction is a negative correlation between job turnover and unemployment. While higher turnover implies more layoffs, it also improves the prospects for the unemployed to find a job as it increases the proportion of hiring firms. In our setting the latter effect dominates the former. Using the data on 20 largest OECD countries we show that the level of unemployment is negatively correlated with the rate of job destruction as is predicted by our model. It has been argued in the literature that higher rates of inflation increase the volatility of the relative demand for goods. In our paper, greater volatility in relative demands leads to higher rates of turnover and thereby to lower rates of unemployment. Thus, we believe that our model can be extended to imply a negative co-movement of inflation and unemployment, i.e., the Phillips curve.
JEL Classification: J64, D83
Suggested Citation: Suggested Citation