Factor Market Search and the Structure of Simple General Equilibrium Models

Abstract

This paper presents a simple general equilibrium model in which unemployed workers search for jobs and vacant firms search for employees. Formally, I develop a two-sector, constrained efficient version of the Diamond-Mortensen-Pissarides matching model of trade coordination. This approach to modeling factor market search appears promising since its algebraic development parallels Jones's treatment of the two-sector model of production, and the latter framework underlies most applied general equilibrium analyses. Some illustrative short-run and steady-state results are presented concerning the behavior of open and closed economies that exhibit unemployment and vacancies.