The Economics of Search∗

The economics of search study the implications of frictions for individual behavior and market performance, due usually to imperfect information about exchange possibilities. This article reviews labor-market research in this area. Individuals search for a job offer by choosing a reservation wage and accepting jobs that pay above that wage. Firms create jobs to maximize profit. The probability of realizing a match is derived from an aggregate matching function that gives the number of jobs formed in terms of the search efforts of firms and workers. Because of monopoly rents implied by frictions, wages are determined either by bargaining or by take-it-or-leave it offers posted by firms. Bargaining models share the surplus and give rise to a single wage for homogeneous labor that in general does not allocate jobs efficiently. Wage posting can give rise to a single wage equal to the worker’s reservation wage if the worker can only observe one wage offer at a time, or to the efficient allocation if posted wages can be observed but there are job queues, or to a distribution of wage offers if employed workers can sample more than one firm at a time. Job destruction is due either to job-specific shocks or to technological obsolescence. The economics of search study the implications of market frictions for economic behavior and market performance. “Frictions” in this context include anything that interferes with the smooth and instantaneous exchange of goods and services. The most commonly-studied problems arise from imperfect information about the location of buyers and sellers, their prices and the quality of the goods and services that they trade. The key implication of these frictions is that individuals are prepared to spend time and other resources on exchange; they search before buying or selling. The labor market has attracted most theoretical and empirical interest in this area of research, ∗Forthcoming in Encyclopedia of the Social and Behavioral Sciences, Elsevier.