This project builds a theory of frictional unemployment based on information imperfections. It is assumed that it is costly for workers to observe the characteristics of all potential employers. Instead, they observe a random subset of employers choosing optimally their sample size. The equilibrium of this model exhibits frictional unemployment; some workers are unemployed, while some eligible employers have open vacancies. However, the implications of this model are much closer to the baseline Walrasian model than to existing modals of frictional unemployment with less solid microfoundations. Besides reaching a number of new and surprising conclusions, this theory has the added advantage of tractability. Preliminary research shows the possibility of using this model to examine the implications of risk-aversion and imperfect labor-income insurance markets for frictional unemployment. As unemployed risk-averse workers consume their assets, they become increasingly willing to look for low wage, low productivity jobs where queues are shorter and employment chances are higher. Thus, optimal job search behavior implies that the expected wage of a worker who has been unemployed for only a short period of time, is much higher than the expected wage of the long-term unemployed who grow extremely risk-averse. This model can also be used to study how heterogeneous workers search for heterogeneous jobs. Previous research, which focused on the matching process and not on the search process, showed that the conclusions of frictionless matching or assignment models do not carry over to a frictional environment without additional assumptions. However, by carefully modeling the information imperfections behind frictional unemployment, this theory establishes that frictionless results generalize to a frictional setting. At any point in time, over 5% of the U.S. labor force suffer from frictional unemployment, and for that reason alone it is important to understand whether the level is optimal. But understanding frictional unemployment is important for other reasons: does a market economy give optimal incentives for an unemployed worker to take a job, or do people search inefficiently, accept inappropriate jobs, or reject appropriate ones? How does frictional unemployment affect the incentives to create new jobs, or to invest in human and physical capita1? This project addresses all these issues and preliminary research leads to substantially different conclusions than the existing literature suggests

Agency
National Science Foundation (NSF)
Institute
Division of Social and Economic Sciences (SES)
Type
Standard Grant (Standard)
Application #
9709881
Program Officer
Daniel H. Newlon
Project Start
Project End
Budget Start
1997-08-01
Budget End
2000-07-31
Support Year
Fiscal Year
1997
Total Cost
$111,154
Indirect Cost
Name
Princeton University
Department
Type
DUNS #
City
Princeton
State
NJ
Country
United States
Zip Code
08540