Search and Matching in the Labor Market without Unemployment Insurance

• Authors: Francesc Obiols-Homs.
• BSE Working Paper: 110155 | September 15
• Keywords: search , incomplete markets , general equilibrium
• JEL codes: D52, D58, E24, J22
• search
• incomplete markets
• general equilibrium

I study the effect of the market arrangement on competitive allocations in a model in which the distribution of idiosyncratic uncertainty is determined endogenously. The particular application I consider is a search model of the labor market embedded in a general equilibrium model with production and asset accumulation. It is shown that costly search with incomplete markets introduces a wealth effect at low levels of wealth such that poor agents do not search much or even find optimal not to look for a job. The combination of this effect with the usual one at higher wealth levels delivers equilibrium allocations that are remarkably different from the one that obtains under complete markets. I also use numerical methods to obtain quantitative predictions in a calibrated version of the model. The effect of the market arrangement remains dramatically large due to search externalities.