The labor search and matching model plays a growing role in macroeconomic analysis. Thispaper provides a critical, selective survey of the literature. Four fundamental questions areexplored: how are unemployment, job vacancies, and employment determined as equilibriumphenomena? What determines worker flows and transition rates from one labor market stateto another? How are wages determined? What role do labor market dynamics play inexplaining business cycles and growth? The survey describes the basic model, reviews itstheoretical extensions, and discusses its empirical applications in macroeconomics. Themodel has developed against the background of difficulties with the use of the neoclassical,frictionless model of the labor market in macroeconomics. Its success includes the modellingof labor market outcomes as equilibrium phenomena, the reasonable fit of the data, and —when inserted into business cycle models — improved performance of more generalmacroeconomic models. At the same time, there is evidence against the Nash solution usedfor wage setting and an active debate as to the ability of the model to account for some of thecyclical facts.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0803.
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