oss - Chapter 2 Job Search Theory 2.1 Introduction Here we...

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Chapter 2 Job Search Theory 2.1 Introduction Here we present the basic job search model, in both discrete and continuous time, and introduce some of the many elaborations and applications that have been discussed in the literature. This focus in this chapter is on decision theory, even though most of the focus in the rest of the book is on equilibrium theory. That is, we are interested for now in the optimization problem of a single agent ¡ such as a worker looking for a job at a good wage ¡ and we make no reference to the problems being solved by other individuals ¡ such as the …rms who presumably set the wages ¡ or the conditions that must be satis…ed for the decisions of all individuals to be consistent. It makes sense to understand the optimization problem of a single in- dividual before he is embed into an equilibrium setting. For example, we usually study consumer theory before analyzing market demand before ana- lyzing general equilibrium. Moreover, beginning with a single-agent problem is a good way to learn some of the “tricks of the trade” that will be used extensively in equilibrium modeling. Additionally, our view is that some in- teresting economic insights can emerge from search theory even when it is not incorporated into a fully articulated equilibrium model. 1 1 The early literature on job search was once caricatured by Rothschild (197x) as 1
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So we proceed in this section with what may well be called one-sided search models, where workers look for jobs taking as given such things as the distribution of wage o¤ers across …rms, without regard to the origin of this distribution. An alternative interpretation, discussed in some of the exercises, concerns the problem of an employer looking for a worker. Many other interpretations are possible, and have been pursued in the literature, including the problem of a buyer looking for a house, an individual looking for a spouse, an investor looking for an opportunity, and so on. The rest of the chapter is organized as follows. In Section 2, we introduce the basic job search problem in discrete time. In Section 3, we analyze a similar problem in continuous time. In particular, we introduce the notion of Poisson process that will be used throughout the rest of the book. In Section 4, we relax some of the many simplifying assumptions made in the basic model and focus on some reasons for turnover (quits and layo¤s). In Section 5, we introduce a restriction on the stochastic structure of the problem and show how it can be used to rule out some rather counterintuitive results that are possible in the unrestricted model. The next chapter will present some extensions and variations on the basic theme. Since the literature on job search is vast, we cannot hope to survey all
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This essay was uploaded on 04/20/2008 for the course ECON 800 taught by Professor Krueger during the Spring '02 term at Stanford.

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oss - Chapter 2 Job Search Theory 2.1 Introduction Here we...

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