The "New Classical" Theory Of Unemployment

Remember, to be "unemployed" means that you don't have a job, but would be willing to work at the "going wage." The implication is that you are "in the market" for a job -- searching for a job. The New Classical economists turn that implication around.

According to New Classical economics, unemployment is "job search" -- that is, people who are unemployed are waiting for a better job match to come along. If a person doesn't take a job today, it's because his best guess is that he can get a better offer by waiting a while and "turning over a few more rocks." This means

A certain amount of unemployment is productive.: Search is a productive activity.
The amount of unemployment we have in society depends on the costs and benefits of job search.: Search will be carried on until the marginal benefit is equal to the marginal cost.

If you don't remember (from micro) how economists use the concepts of "marginal cost" and "marginal benefit," you won't be far off in thinking of them as the supply and demand curves for job search -- except that the market is inside the person's head. The intersection of marginal cost and marginal benefit is the equilibrium of the individual's internal "market" for job search. Thus, in some sense, we have unemployment (job search) even though "supply is equal to demand" (the marginal cost of job search equals the marginal benefit of job search).

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