Careers & the Labor Market
The Economics of Job Search
How economists model the search for a job, why unemployment exists even when jobs are available, and what that means for job seekers.
Even in strong economies, some people are unemployed while employers have unfilled vacancies. Economists explain this with search theory: finding the right job, and the right worker, takes time and effort.
Search and matching
Job seekers and employers must find each other. Workers look for jobs that match their skills, location and pay expectations. Employers look for suitable candidates. This process of matching involves costs: time spent searching, applying and interviewing.
In 2010, Peter Diamond, Dale Mortensen and Christopher Pissarides shared the Nobel prize in economics for their work on search and matching in labour markets.
The reservation wage
A key idea is the reservation wage: the lowest wage a job seeker will accept. A higher reservation wage means rejecting more offers and searching longer, in the hope of a better match. A lower one means accepting a job sooner.
What shapes the reservation wage?
- Savings and benefits: people with more financial cushion can afford to wait longer.
- Expectations about what jobs are available.
- The cost of searching, including transport and time.
Frictional unemployment
Unemployment caused by the time it takes to match workers and jobs is called frictional unemployment. It exists even in healthy economies and is not necessarily bad: time spent searching can lead to better matches, higher productivity and longer-lasting jobs.
A new graduate receives an offer paying 25,000 rupees a month in an unrelated field. She believes that with a few more weeks of searching she could find a job in her field paying 35,000 rupees. If she has savings to support herself, waiting may pay off. If she cannot afford to wait, accepting the first offer may be wiser, and she can keep searching while employed.
Improving matching
Job boards, online platforms, recruitment agencies, career fairs and public employment services all aim to reduce search costs. Research suggests that better information, such as helping job seekers search more broadly, can shorten unemployment spells.
Barriers for disabled job seekers
For blind and disabled job seekers, inaccessible application websites, interview processes and employer assumptions add to search costs. Specialised employment services and accessible hiring processes help level the field.
Some unemployment reflects the time needed to find a good match, even when vacancies exist. Other unemployment arises from a real shortage of jobs in a downturn. Distinguishing the two matters for policy.
- Search theory explains why unemployment and vacancies coexist.
- Diamond, Mortensen and Pissarides won the 2010 Nobel prize for search and matching research.
- The reservation wage is the lowest wage a job seeker will accept.
- Frictional unemployment reflects matching time and can lead to better jobs.
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