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In this chapter, we have reviewed some New Classical ideas on unemployment, evaluated them against some evidence, and tried to extend them to incorporate the insights they offer in a view which is not New Classical but fundamentally a compromising kind of Keynesian thinking.
The New Classical idea is that unemployment is not an excess supply of labor but is "job search." The amount of job search (and therefore unemployment) is determined by the costs and benefits of job search, and may well be efficient. If it is not efficient, then the policies to deal with it are policies that change job search behavior -- making the matching function of the job markets more efficient, for example, or cutting the dole to unemployed people.
This does not seem a good fit for unemployment as a whole, because unemployment is highly permanent and because unemployment seems to vary widely without comparable changes in the costs and benefits of job search. However, the job search model seems to fit one of the three components of unemployment well: frictional unemployment.
When we think of unemployment as a pool of people, and think in terms of the flows into and out of the pool, we realize that job search has to do with only one of the flows. When we further extend that by considering some of the other things besides waiting that contribute to successful or unsuccessful job search, we see that the quantity of opportunities for successful job search could be a crucial determinant of the flow from unemployed to employed status. Extended in this way, the search model can help us to understand cyclical unemployment, although more in a Keynesian way than in a New Classical way. Finally, we explored structural unemployment -- perhaps the most important component in industrialized economies in the 1990's -- and it seems that structural unemployment remains an unsolved problem, both for economic theory (in all its forms!) and for society.