Search Frictions, Efficiency Wages and Equilibrium Unemployment

This paper explores the decomposition of equilibrium unemployment into involuntary and frictional components using a model that combines efficiency wages with search and matching frictions in the labour market. In deriving our results we generalize the celebrated Solow Condition, expressing the wage as the sum of a pure efficiency wage component and a component that reflects search frictions. Using standard values of calibrated parameters, we find that the bulk of unemployment is involuntary