From one to many islands : the emergence of search and matching models

The notion of frictional unemployment first arose in the writings of Beveridge, Pigou and Hicks. Why did it fail at the time to grow into a fully fledged theory ? Our answer is simple. This failure was due to the fact these economists were unwilling and/or unable to go beyond the then-prevailing Marshallian approach, in particular to depart from its trade organization assumptions. They did not realize that these assumptions excluded any rationing outcome in general, and any unemployment result in particular. We make our claim in three steps. First, we make explicit the trade-organization assumptions underpinning Marshall’s equilibrium theory. Our second step is a study of the attempts at introducing unemployment in a Marshallian framework. We start with an examination of Beveridge’s, Pigou’s and Hicks’s early works on wages and unemployment. We also briefly discuss how and why Keynes was able to shift attention from frictional to involuntary unemployment. Newt, for a reason that will become clear as the paper evolves, we ponder Friedman’s celebrated Presidential Address inaugurating the notion of a natural rate of unemployment. In our third and last step we look at the papers by McCall, Lucas and Prescott, Mortensen and Pissarides that paved the way for the present thriving research literature. We show that their success in providing an equilibrium unemployment result stems from the fact that they have indeed departed from the Marshallian trade-organization assumptions