The Search Model of Unemployment

Search Theory of Unemployment Explained

This macroeconomic search model assumes that unemployment is primarily frictional, meaning that it is caused by people searching for an “acceptable” wage. First we shall investigate the benefits of being employed vs. being unemployed, and then use our findings to build a model based on reservation wages – the lowest wage that a worker finds acceptable. Finally, we’ll see what the model predicts for changes in taxes and the benefits system, and how this will alter unemployment within an economy.