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Chapter 6
Search and Unemployment

 Teaching Goals
Search is a key element in economic activity, and this chapter is devoted to two search models – a one-
sided model and a two-sided model – that capture different aspects (and some of the same ones, in
somewhat different ways) of search, and why it is important in macroeconomic models, and for giving
insight into how labor markets work.

The one-sided model is a partial equilibrium framework that explains how an unemployed worker
behaves, when facing an exogenous distribution of wage offers. This model tells us the determinants of the
unemployed worker’s reservation wage. If an offer is received at or above the reservation wage, the
unemployed worker accepts the offer; otherwise he or she declines and continues to search. The
reservation wage then determines a long-run unemployment rate, which is the steady state unemployment
rate if the wage offer distribution stays fixed and there is a constant separation rate.

The second model – the two-sided search model – is a static version of the widely used Diamond-
Mortensen-Pissarides model of search and unemployment. This model differs from the one-sided model in
that it is general equilibrium, and focuses on the decision by firms concerning how many job vacancies to
post. Students should not have difficulty understanding the model, but they may need some additional
help, as the approach is somewhat different than what we use in standard competitive equilibrium models,
for example in Chapter 5. However, it helps to think of the labor market in terms of demand and supply
sides. Then, it is possible to use what a student knows from Chapter 5 to teach them about the two-sided
search model. Workers and firms care about the wage in the same way they do in a competitive model, but
now the market “clears” in a different way. Workers care not only about the wage, but the unemployment
insurance benefit (because their job search may be unsuccessful) and labor market tightness (which
determines the chances of finding a job). Would-be employers care about labor market tightness and the
cost of posting a vacancy, as well as the market wage. The matching function, which determines the
number of successful matches as a function of matching efficiency and the numbers of firms and
consumers searching, is an important concept. In this case, appeal to what students know about the
production function, as the matching function has the same properties. Then, one can appeal by analogy to
production so that the student understands how the matching process takes place.

It is important first to understand the labor market data. The two-sided search model is very nice, as the
variables in the model match up almost exactly with the labor market data as measured. The unemployed
are those who chose to search but were unsuccessful, the labor force is the number of people who actively
searched and found a job (employed) plus the number who actively searched and were unsuccessful (the
unemployed), etc.

The experiments in the model – increase in the unemployment insurance benefit, increase in productivity,
decrease in matching efficiency – are all useful in understanding recent economic events and less-recent
ones.

Copyright ©2018 Pearson Education, Inc.

 Chapter 6 Search and Unemployment 55

 Classroom Discussion Topics

It should not be hard to get students talking about unemployment. Most of them should know someone
who has been unemployed, or they have read about unemployment as it relates to the recent recession.
However, students may not understand how unemployment is actually defined, or how economists think
about it. An important feature of the search models is that there will be unemployment under any
circumstances, and students should understand that we cannot make unemployment go away, nor should
we want it to.

It will be helpful if students understand why a search-model approach is necessary to understanding

unemployment. Get them thinking about what unemployed people are actually doing, and what is
motivating them. Unemployment is an economically measurable activity, and we want to take a scientific
approach to thinking about it.

Also, get the students to think about what motivates firms to search for workers to fill job openings. Why
is searching for workers costly? What difficulties does a firm face in hiring workers? How does matching
between firms and workers take place? Why is the market for labor similar to, and different from, the
market for a good or service?

Students should be encouraged to think about government intervention and how it matters for labor market
behavior. What will unemployment insurance do? How can the government speed up or slow down the
matching process in the labor market?

 Outline
1. The Behavior of the Unemployment Rate, the Participation Rate, and the Employment/Population
Ratio in the United States
A. Unemployment Rate, Participation Rate, and Employment/Population Ratio: Data
B. Key Determinants of the Unemployment Rate: Aggregate Economic Activity, Demographics,
Government Intervention, Mismatch

2. A One-Sided Search Model

A. Welfare of the Employed and Unemployed
B. Reservation Wage
C. Determining the Unemployment Rate
D. Unemployment Insurance Benefits
E. Job Offer Rate

3. The Two-Sided Model of Search and Unemployment

A. Consumers
B. Firms
C. Matching
D. Optimization by Consumers
E. Optimization by Firms
F. Equilibrium
G. An Increase in the Unemployment Insurance Benefit
H. An Increase in Productivity
I. A Decrease in Matching Efficiency
J. The Beveridge Curve

Copyright ©2018 Pearson Education, Inc.

56 Williamson • Macroeconomics, Sixth Edition

 Learning Objectives
1. List the key labor market facts concerning the unemployment rate, the participation rate, and the
employment/population ratio.
2. Describe the Beveridge curve, and explain its importance.
3. In the one-sided search model, explain how the reservation wage is determined.
4. Show how the one-sided search model determines the unemployment rate.
5. Use the one-sided search model to determine the effects of changes in the labor market on the
efficiency wage and the unemployment rate.
6. Construct an equilibrium in the two-sided search model.
7. Use the two-sided search model to explain how shocks to the labor market change labor force
participation, unemployment, vacancies, aggregate output, and labor market tightness

Copyright ©2018 Pearson Education, Inc.

 Chapter 6 Search and Unemployment 57

 Solutions to End-of-Chapter Problems

1. If the separation rate s increases, this has two effects. In Figure 6.14, this shifts down the curve
Ve(w), as a job is now worth less – a worker has a greater chance of being separated from the job
at any wage. As a result, the reservation wage w* will increase, as the consumer becomes more
picky about the jobs he or she will take. That is, unemployment is more attractive relative to
working. So, H(w*), which is the chances of receiving a job offer that is acceptable, falls. So in the
second panel of Figure 6.14, UpH(w*) shifts down, and s(1-U) shifts up. Therefore, on net, the
long-term unemployment rate must rise. That is, workers are being separated from jobs at a higher
rate, causing a higher flow from employment to unemployment, and the unemployed are accepting
jobs at a lower rate, creating a lower flow from unemployment to employment. These two effects
both work to increase the unemployment rate.

2. If TFP increases, so that wages increase for all jobs, this has no effect on the reservation wage, as
neither Ve(w) nor Vu changes. But H(w) increases for each w, as the chances of receiving a job
offer higher than w increases for any w. Thus, in the second panel of Figure 6.14, the curve
UpH(w*) shifts up, and the long-term unemployment rate falls. As wages are higher, workers have
a better chance of finding an acceptable job, which acts to increase the flow from unemployment
to employment, which reduces the unemployment rate.

3. If it is harder to qualify for unemployment insurance, this works in the same way as a reduction in
the unemployment insurance benefit b. From Figure 6.15, the reservation wage falls, and the long-
term unemployment rate falls.

4. More labor-saving devices has the effect of reducing the payoff to working at home for all
consumers, which reduces v(Q) for each value of Q. As a result, the curve in panel (a) of Figure
6.1 shifts up. In equilibrium, Q increases, but j remains unchanged. The unemployment rate and
the vacancy rate are unaffected, but the labor force Q increases. Since j = A/Q, therefore the
number of firms A increases. Aggregate output Y = Qem(1,j), so Y increases, as Q has risen and j
is unchanged. Labor saving devices make searching for work more attractive relative to working at
home for consumers. With more consumers in the market, labor market tightness tends to go
down, which attracts more firms into the labor market. Ultimately, the number of active firms
increases proportionally to the number of consumers searching for work, and there is no change in
labor market tightness in equilibrium. Output goes up because there are more successful matches
in the labor market.

Copyright ©2018 Pearson Education, Inc.

58 Williamson • Macroeconomics, Sixth Edition

Figure 6.1

5. (i) With a subsidy s to hiring a worker, for a successful match, the surplus of the firm is z+s-w, the
surplus of the worker is w-b, total surplus is z+s-b, and the wage (from Nash bargaining) is
w=a(z+s)+(1-a)b. Then, on the supply side of the labor market, the equation determining the curve in
panel (a) of Figure 6.2 is given by

v(Q)=b+em(1,j)a(z+s-b),

and on the demand side of the market, the equation determining j is

(k/((1-a)(z+s-b)))=em((1/j),1)

Then, in Figure 6.2, comparing the equilibrium when s=0 to one with s>0, the subsidy acts to increase
labor market tightness, j, and to increase the labor force, Q. The subsidy acts to induce more firms to
enter the labor market to search for workers, which makes j=(A/Q) higher. This in turn acts to make

Copyright ©2018 Pearson Education, Inc.

 Chapter 6 Search and Unemployment 59

search more attractive for workers, as it is now easier to find a job. As well, the subsidy increases the
wage, which further increases the incentive to search for work. The unemployment rate is 1-em(1,j),
which falls when j increases, so the subsidy reduces the unemployment rate.
(ii) If the government pays would-be workers to stay out of the labor market, this has no effect on
the demand side (firms' behavior). However, the supply side of the labor market is now characterized
by the equation

q+v(Q)=b+em(1,j)a(z+s-b),

Therefore, when q>0, this shifts the curve in the upper panel of Figure 6.2 to the right. There is no
effect on labor market tightness, j, and therefore no effect on the unemployment rate. However, Q
falls. Since j does not change, this implies that A falls as well, since j=(A/Q). Therefore, this policy has
the effect not only of reducing the number of would-be workers looking for work, but it reduces the
number of firms searching for workers. The policy has an unintended side effect and has no effect on
the unemployment rate.

Figure 6.2

Copyright ©2018 Pearson Education, Inc.

60 Williamson • Macroeconomics, Sixth Edition

6. The lower recruiting cost, k, affects only the demand side of the labor market. In Figure 6.3, labor
market tightness increases from j₁ to j₂, and the labor force increases from Q₁ to Q₂. The
unemployment rate is 1-em(1,j), which decreases because of the increase in j, and the vacancy rate is
1-em((1/j),1), which increases. Since j=(A/Q), and since Q and j increase, A also increases. Aggregate
output is Qem(1,j)z, which increases, as Q and j both increase. Thus, the lower cost of recruiting
induces more firms to enter the labor market, which increases labor market tightness, inducing more
workers to enter the labor market to search for work, as the chances are now better of finding a job.

Figure 6.3

7. For this question, re-define labor market tightness as j = (A+G)/Q. Then, the diagram we work with
looks identical to Figure 6.10 in Chapter 6, and Q and j are determined as in Figure 6.10. Note in
particular that G is irrelevant for determining Q and j, so government activity is irrelevant for the size
of the labor force and labor market tightness. Further, government activity will not matter for the
unemployment rate, the vacancy rate, or aggregate output. However, since j and Q do not change when
G changes, A+G = jQ does not change either. But then an increase in G must reduce A by the same
amount. Therefore, government activity simply reduces the number of private firms by an equal
amount, and there is otherwise no effect on economic activity. The key to this result is that the

Copyright ©2018 Pearson Education, Inc.

 Chapter 6 Search and Unemployment 61

government was assumed to be no better or worse at producing output than private sector firms.
Therefore, the scale of government activity could not matter for aggregate variables.

8. If all social welfare programs simultaneously become more generous, suppose that we represent this as
a payment p to each person not in the labor force, and an increase by p in the employment insurance
benefit. Then, the equation that summarizes behavior on the supply side of the labor market becomes

v(Q) + p = b + p + em(1,j)a(z-b-p),

or, simplifying,

v(Q) = b + em(1,j)a(z-b-p).

As well, the equation summarizing demand-side behavior in the labor market can be written as

em(1/j,1) = k/(1-a)(z-b-p)

Therefore, in Figure 6.4, labor market tightness falls from j1 to j2, and the labor force falls from Q1 to
Q2. As a result, the unemployment rate increases and the vacancy rate decreases. The number of firms
is A=jQ, so A decreases. As well, output is Y=zQem(1,j), so output also falls. Consumers are affected
by two social programs – one that pays a benefit to people not in the labor force, and one that pays an
employment insurance benefit to the unemployed. Since the consumer receives the employment
insurance benefit only in the event that search for work is unsuccessful, the increase in generosity of
all social programs will on net discourage consumers from searching for work. Further, more generous
social programs reduce the total surplus from a successful match, and this discourages firms from
posting vacancies. On net, labor market tightness goes down, the labor force contracts, and aggregate
output decreases, with the unemployment rate increasing and the vacancy rate decreasing.

Copyright ©2018 Pearson Education, Inc.

62 Williamson • Macroeconomics, Sixth Edition

Figure 6.4

Copyright ©2018 Pearson Education, Inc.

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floor; I holding on for dear life to the tomahawk ... fastened to his
wrist by a strong thong of leather.... At last he got a lock round my
leg; and had it not been for the table on which we both fell, and
which in smashing to pieces, broke our fall, I might have been
disabled.... We now rolled over and over on the floor like two mad
bulldogs; he trying to bite, and I trying to stun him by dashing his
bullet head against the floor. Up again! another furious struggle in
course of which both our heads and half our bodies were dashed
through the two glass windows, and every single article of furniture
was reduced to atoms. Down again, rolling like made, and dancing
about among the rubbish—wreck of the house. Such a battle it was
that I can hardly describe it.
“By this time we were both covered with blood from various
wounds.... My friend was trying to kill me, and I was only trying to
disarm and tie him up ... as there were no witnesses. If I killed him, I
might have serious difficulties with his tribe.
“Up again; another terrific tussle for the tomahawk; down again
with a crash; and so this life and death battle went on ... for a full
hour ... we had another desperate wrestling match. I lifted my friend
high in my arms, and dashed him, panting, furious, foaming at the
mouth—but beaten—against the ground. His God has deserted him.
“He spoke for the first time, ‘Enough! I am beaten; let me rise.’
“I, incautiously, let go his left arm. Quick as lightning he snatched
at a large carving fork ... which was lying among the debris; his
fingers touched the handle and it rolled away out of his reach; my life
was saved. He then struck me with all his remaining fire on the side
of the head, causing the blood to flow out of my mouth. One more
short struggle and he was conquered.
“But now I had at last got angry ... I must kill my man, or sooner
or later he would kill me.... I told him to get up and die standing. I
clutched the tomahawk for the coup de grace. At this instant a
thundering sound of feet ... a whole tribe coming ... my friends!... He
was dragged by the heels, stamped on, kicked, and thrown half
dead, into his canoe.
 “All the time we had been fighting, a little slave imp of a boy
belonging to my antagonist had been loading the canoe with my
goods and chattels.... These were now brought back.”
In the sequel this desperado committed two more murders “and
also killed in fair fight, with his own hand the first man in a native
battle ... which I witnessed.... At last having attempted to murder
another native, he was shot through the heart ... so there died.”
Mr. Maning was never again molested, and making full
allowance for their foibles, speaks with a very tender love for that
race of warriors.
 LVI
A.D. 1840
A TALE OF VENGEANCE

IN the days of the grandfathers, say ninety years ago, the

Americans had spread their settlements to the Mississippi, and that
river was their frontier. The great plains and deserts beyond, all
speckled now with farms and glittering with cities, belonged to the
red Indian tribes, who hunted the buffalo, farmed their tobacco,
played their games, worshiped the Almighty Spirit, and stole one
another’s horses, without paying any heed to the white men. For the
whites were only a little tribe among them, a wandering tribe of
trappers and traders who came from the Rising Sun Land in search
of beaver skins. The beaver skins were wanted for top hats in the
Land of the Rising Sun.
These white men had strange and potent magic, being masters
of fire, and brought from their own land the fire-water and the
firearms which made them welcome among the tribes. Sometimes a
white man entered the tribes and became an Indian, winning his rank
as warrior, marrying, setting up his lodge, and even rising to the
grade of chief. Of such was Jim Beckwourth, part white, part negro,
a great warrior, captain of the Dog Soldier regiment in the Crow
nation. His lodge was full of robes; his wives, by whom he allied
himself to the leading families, were always well fed, well dressed,
and well behaved. When he came home with his Dog Soldiers he
always returned in triumph, with bands of stolen horses, scalps in
plenty.
Long afterward, when he was an old man, Jim told his
adventures to a writer, who made them into a book, and in this
volume he tells the story of Pine Leaf, an Indian girl. She was little
more than a child, when, in an attack of the Cheyennes upon the
village, her twin brother was killed. Then, in a passion of rage and
grief, she cut off one of her fingers as a sacrifice to the Great Spirit,
and took oath that she would avenge her brother’s death, never
giving herself in marriage until she had taken a hundred trophies in
battle. The warriors laughed when she asked leave to join them on
the war-path, but Jim let her come with the Dog Soldiers.
Rapidly she learned the trade of war, able as most of the men
with bow, spear and gun, running like an antelope, riding gloriously;
and yet withal a woman, modest and gentle except in battle, famed
for lithe grace and unusual beauty.
“Please marry me,” said Jim, as she rode beside him.
“Yes, when the pine leaves turn yellow.”
Jim thought this over, and complained that pine leaves do not
turn yellow.
“Please!” he said.
“Yes,” answered Pine Leaf, “when you see a red-headed Indian.”
Jim, who had wives enough already as became his position,
sulked for this heroine.
She would not marry him, and yet once when a powerful
Blackfoot had nigh felled Jim with his battle-ax, Pine Leaf speared
the man and saved her chief. In that engagement she killed four
warriors, fighting at Jim’s side. A bullet cut through his crown of
eagle plumes. “These Blackfeet shoot close,” said Pine Leaf, “but
never fear; the Great Spirit will not let them harm us.”
In the next fight, a Blackfoot’s lance pierced Jim’s legging, and
then transfixed his horse, pinning him to the animal in its death
agony. Pine Leaf hauled out the lance and released him. “I sprang
upon the horse,” says Jim, “of a young warrior who was wounded.
The heroine then joined me, and we dashed into the conflict. Her
horse was immediately after killed, and I discovered her in a hand-to-
hand encounter with a dismounted Blackfoot, her lance in one hand
and her battle-ax in the other. Three or four springs of my steed
brought me upon her antagonist, and striking him with the breast of
my horse when at full speed, I knocked him to the earth senseless,
and before he could recover, she pinned him to the earth and
scalped him. When I had overturned the warrior, Pine Leaf called to
me, ‘Ride on, I have him safe now.’”
She was soon at his side chasing the flying enemy, who left
ninety-one killed in the field.
In the next raid, Pine Leaf took two prisoners, and offered Jim
one of them to wife. But Jim had wives enough of the usual kind,
whereas now this girl’s presence at his side in battle gave him
increased strength and courage, while daily his love for her flamed
higher.
At times the girl was sulky because she was denied the rank of
warrior, shut out from the war-path secret, the hidden matters known
only to fighting men. This secret was that the warriors shared all
knowledge in common as to the frailties of women who erred, but
Pine Leaf was barred out.
There is no space here for a tithe of her battles, while that great
vengeance for her brother piled up the tale of scalps. In one
victorious action, charging at Jim’s side, she was struck by a bullet
which broke her left arm. With the wounded arm nursed in her
bosom she grew desperate, and three warriors fell to her ax before
she fainted from loss of blood.
Before she was well recovered from this wound, she was afield
again, despite Jim’s pleading and in defiance of his orders, and in an
invasion of the Cheyenne country, was shot through the body.
“Well,” she said afterward, as she lay at the point of death, “I’m
sorry that I did not listen to my chief, but I gained two trophies.” The
very rescue of her had cost the lives of four warriors.
While she lay through many months of pain, tended by Jim’s
head wife, her bosom friend, and by Black Panther, Jim’s little son,
the chief was away fighting the great campaigns, which made him
famous through all the Indian tribes. Medicine Calf was his title now,
and his rank, head chief, for he was one of two sovereigns of equal
standing, who reigned over the two tribes of the Crow nation.
While Pine Leaf sat in the lodge, her heart was crying, but at last
she was able to ride again to war. So came a disastrous expedition,
in which Medicine Calf and Pine Leaf, with fifty Crow warriors and an
American gentleman named Hunter, their guest, were caught in a pit
on a hillside, hemmed round by several hundred Blackfeet. They had
to cut their way through the enemy’s force, and when Hunter fell, the
chief stayed behind to die with him. Half the Crows were slain, and
still the Blackfeet pressed hardly upon them. Medicine Calf was at
the rear when Pine Leaf joined him. “Why do you wait to be killed?”
she asked. “If you wish to die, let us return together. I will die with
you.”
They escaped, most of them wounded who survived, and almost
dying of cold and hunger before they came to the distant village of
their tribe.
Jim’s next adventure was a horse-stealing raid into Canada,
when he was absent fourteen months, and the Crows mourned
Medicine Calf for dead. On his triumphant return, mounted on a
piebald charger the chief had presented to her, Pine Leaf rode with
him once more in his campaigns. During one of these raids, being
afoot, she pursued and caught a young Blackfoot warrior, then made
him her prisoner. He became her slave, her brother by tribal law, and
rose to eminence as her private warrior.
Jim had founded a trading post for the white men, and the United
States paid him four hundred pounds a year for keeping his people
from slaughtering pioneers. So growing rich, he tired of Indian
warfare, and left his tribe for a long journey. As a white man he came
to the house of his own sisters in the city of Saint Louis, but they
seemed strangers now, and his heart began to cry for the wild life.
Then news came that his Crows were slaying white men, and in
haste he rode to the rescue, to find his warriors besieging Fort Cass.
He came among them, their head chief, Medicine Calf, black with
fury at their misdeeds, so that the council sat bewildered, wondering
how to sue for his forgiveness. Into that council came Pine Leaf.
“Warriors,” she cried, “I make sacrifice for my people!” She told them
of her brother’s death and of her great vengeance, now completed in
that she had slain a hundred men to be his servants in the other
world. So she laid down her arms. “I have hurled my last lance; I am
a warrior no more. To-day Medicine Calf has returned. He has
returned angry at the follies of his people, and they fear that he will
again leave them. They believe that he loves me, and that my
devotion to him will attach him to the nation. I, therefore, bestow
myself upon him; perhaps he will be contented with me and will
leave us no more. Warriors, farewell!”
So Jim Beckwourth, who was Medicine Calf, head chief of the
Crow nation, was wedded to Pine Leaf, their great heroine.
Alas for Jim’s morals, they did not live happily ever after, for the
scalawag deserted all his wives, titles and honors, to become a
mean trader, selling that fire-water which sapped the manhood of the
warrior tribes, and left them naked in the bitter days to come. Pine
Leaf and her kindred are gone away into the shadows, and over their
wide lands spread green fields, now glittering cities of the great
republic.
THE END
 Transcriber’s Notes
Punctuation, hyphenation, and spelling were made
consistent when a predominant preference was found in the
original book; otherwise they were not changed.
Simple typographical errors were corrected; unbalanced
quotation marks were remedied when the change was
obvious, and otherwise left unbalanced.
Illustrations in this eBook have been positioned between
paragraphs and outside quotations.
The pages in the introductory chapter “Adventurers” were
not numbered. Transcriber did so with Roman numbers.
Page 210: “the overload Joy” may be a misprint for “the
overloaded Joy”.
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