Equilibrium Search Theory And The Equilibrium Search Model

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The classical competitive equilibrium theory assumes that there is centralized market where buyers and sellers of labor can meet and trade at a single price. In reality the supply-and-demand approach seems poorly suited for some questions that arise in the labor market. Particularly questions such as why identical workers in an identical job position are paid differently? How are wages determined? Is there bargaining between firms and workers? Equilibrium search theory provides a rigorous but manageable framework that can be used to address these and related questions. According to Cahuc and Zylberberg (2004) “The theory of perfect competition predicts that identical individuals with identical jobs should receive the same wage”. The authors …show more content…
The latter studies the labor market from both the workers and employers perception and describes supply, demand, and wage determinants simultaneously. Equilibrium search models are distinguished by two approaches. First is the Equilibrium Unemployment Approach. This approach by employing a rational forward looking agent paradigm explains job flows and unemployment levels. It uses a matching function which describes the relationship between a worker and an available job. Second is the Wage Posting Approach. This approach mainly focuses on wage dispersion as an equilibrium outcome in market with frictions, where friction is the search cost. The job search theory was first developed in the 1970s and began with the sequential problem of an unemployed worker seeking employment for consecutive periods, which was the fundamental factor of creating the partial job search models. Different from the neoclassical theory, in these models it is considered that the worker needs time and other resources to find a job. There are various job search models, and among these models are those with and without on-the-job search, an equilibrium search models with wage posting, matching and bargaining, with heterogeneity between firms and workers leisure, …show more content…
As it is known from the competitive labor supply-demand approach, it does not well explain markets with frictions and in reality this is the case. The competitive labor market paradigm does not address questions such as:
• Why identical workers in identical job positions are paid differently?
• How is the labor market affected by changes of the binding minimum wage and unemployment insurance?
• How do firms and workers interact and what is the wage determination mechanism?
• Is a search random, or do firms attract workers by posting higher wages?
• If a firm attracts workers, would it be able to attain them and hence survive in the market?
• What factors determine workers reservation wage and how do they respond to changes in these

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