Job Search and the Labor Dropout Problem Reconsidered

Abstract

This paper establishes the existence of an equilibrium wage distribution for a labor market in which job seekers search sequentially. The search model shows why some workers will drop out of the market. Previous analysis of policies designed to reduce the number of dropouts was partial because wage distributions were exogenously given. Through the use of the equilibrium wage distribution implied by each policy, the analysis here shows that subsidizing search or imposing a minimum wage will reduce the number of dropouts, while a job training program or a reduction in unemployment compensation may either increase or decrease the number of dropouts.