An Equilibrium Model of Search unemployment.

This paper develops a simple equilibrium model of search unemployment. By this term we mean the unemployment resulting from the rational rejection of available wage offers by unemployed job seekers in favor of further search for more lucrative offers. We focus on the effects of unemployment compensation on the equilibrium rate of search unemployment, both because unemployment compensation is an important policy issue and because the standard analysis of unemployment compensation provides a convenient straw man against which to motivate our approach. In this paper we develop a simple steady-state general equilibrium model with sequential search in which a nondegeneratc wage offer distribution is endogenously determined. The search unemployment associated with the wage offer distribution is a Nash equilibrium outcome in the sense of being generated by the simultaneous optimizing behavior of firms and individuals in the economy. The equilibrium wage offer distribution and hence the equilibrium unemployment rate will vary with the amount of unemployment compensation available. We can therefore carry out a comparative statics analysis of the effects of unemployment compensation taking into account the endogeneity of the wage offer distribution. [ABSTRACT FROM AUTHOR]