Barro, Chapter 10
Craig Burnside
Economics 302
University of Virginia
Shortcomings of Our Existing Model
• An important shortcoming of the existing model is that the labor market operates like a commodity market in the real world. That is, it is a very smooth functioning,or frictionless market. This means that if the household determines that it wants to supply L units of labor it can.
• Our model can explain variations in total hours worked–equal to the number ofor wkers the households supply times hours per worker–along the dimensions of employment and hours per worker, but it cannot explain unemployment.
• Unemployed workers are workers who are in the labor force, in the sense that they are actively seeking work, but who are not employed. In our model the labor force and employment are the same. If someone actively seeks work they Þnd it because there are no frictions.
• The real world labor market has frictions: search is required on the part of job seekers and Þrms in order for employment to take place. Once we take search into account we can explain unemployment.