The Economics Book

304

I

t is usually easy to decide

where to buy bread or soap.

There are many supermarkets,

and they are easy to find. But what

about locating a particular make of

used car or an antique musical

instrument? According to the

classical view of the market—

where supply and demand always

balance—buyers and sellers find

each other immediately, without

cost, and have perfect information

about the prices of all goods and

services. However, anyone who

has tried to find a used car—or a

new house or partner—knows that

it rarely works like this in reality.

Search frictions

Markets are said to have “search

frictions” when buyers and sellers

do not automatically find each other.

Economists have gradually

developed “search theory” to

investigate these frictions. One of

the theory’s main focuses has been

on job searches and unemployment.

The classical model of the labor

market assumes a labor supply

schedule (the number of workers

willing to work at a given wage)

and a labor demand schedule (the

number of jobs offered at a given

wage). When the wage for each

schedule matches, supply equals

demand and the market is in

equilibrium. So how can it be that

at any one time there are many

workers looking for jobs and

employers looking for workers?

In the 1960s US economist George

Stigler argued that the “one wage”

market used by classical

economists would only occur where

there is no cost for information

about wages offered or sought. In

any market where products (such

as jobs) are all different, searching

FINDING A JOB

IS LIKE FINDING A

PARTNER OR A HOUSE

SEARCHING AND MATCHING

IN CONTEXT

FOCUS

Decision making

KEY THINKER

George Stigler (1911–91)

BEFORE

1944 British politician William

Beveridge argues that if the

unemployment rate is high, the

number of job vacancies is low.

AFTER

1971 US economist Peter

Diamond shows that costly

search frictions prevent the

law of “one wage” from

working in practice.

1971 US economist Dale

Mortensen looks at how

unemployment can rise among

skilled workers, even when

there are jobs available.

1994 British economist

Christopher Pissarides

provides empirical data and

models for search and

matching theory.

Online dating agencies are markets

where people are both buyers and

sellers. Individuals cannot search

indefinitely so they will work most

effectively if they search within a range.