Macroeconomic implications of search theory for the labour market

Abstract

‘While the usual job search problem is a microeconomic one, this paper applies labour market data to a standard search model to extract macroeconomic implications. A theoretical relationship between the minimum wage, subsistence wage and reservation wage is posited and found to be violated in the data. The paper raises several issues of public policy. It finds that the minimum wage offered is low. It provides a measure of the ‘quality’ of the labour market, and discusses how it may be improved, by increasing the minimum wage, reducing bargaining between the supply and demand sides of the labour market, and curbing wage volatility.