New Developments in Models of Search in the Labour Market

This paper surveys recent work in equilibrium models of labor markets characterized by search and recruitment frictions and by the need to reallocate workers across productive activities. The duration of unemployment and jobs and wage determination are treated as endogenous outcomes of job creation and job destruction decisions made by workers and firms. The solutions studied are dynamic stochastic equilibria in the sense that time and uncertainty are explicitly modeled, expectations are rational, private gains from trade are exploited and the actions taken by all agents are mutually consistent. A number of alternative wage determination mechanisms are explored, including the frequently studied non-cooperative wage bargaining and wage posting by firms. We use the framework to study the influence of alternative labor market institutions and policies on wages and unemployment.