Search

In the theory of competitive markets, "classical" economists had often made the simplifying assumption of "perfect information." That is, the assumption is that people have all the information they need to buy and sell, at the best price, the things they want to buy and sell. But the New Classical economists (and many other economists) reasoned that labor markets are not like that. Job-seekers often don't know what jobs are available, and employers don't know who is available until they go into the job market to find out.

People who don't have all the information they need are not helpless. They can find, or produce, the information they need. In economics, finding or producing information is called "search."

Search is an economic activity, a productive activity, much like other productive activities. Search has costs and benefits, and the costs and benefits will limit the amount of search. For example, suppose you are searching for a diamond by turning over rocks. (There is an open-air diamond mine in Arkansas where you can do that, for an admission fee). The benefit of turning over the next rock is a one-in-ten million chance of finding a big diamond. The cost of turning over one more rock is the effort of bending over. As long as the extra benefit is greater than the extra cost, you will keep turning over rocks. But the more rocks you turn over, the more tired you get, and the greater the effort-cost of bending over to turn another rock becomes. When the cost of turning over the next rock is greater than the benefits of a one-in-ten-million chance of finding a big diamond, you will stop searching.

That's the basic analogy for the New Classical theory of unemployment. If you are in the market for a job, you are searching for a good match with an employer. You will search as long as the benefits from "turning over another rock" exceed the cost (allowing for the risk that the next contact will not be a good one) and when the additional costs exceed the benefits, you will quit searching -- and accept the last offer or get out of the labor force.

The Answer