Aggregate Demand, Job Search, and Employment

This paper presents a critical evaluation of the recent emphasis on job-search and employment-acceptance friction as an explanation for the actual causal relationship between aggregate demand and employment. Although job-search theory seems to provide a choice-theoretic basis for the relationship between aggregate demand and employment, the paper points out that prominent qualitative aspects of the predicted relationship between aggregate demand and employment are empirically unacceptable. In particular, the analysis of employment-acceptance friction (1) does not allow for layoffs and nonwage rationing of jobs, (2) predicts that cyclical variations in employment will involve countercyclical variation in real wages rates, and (3) predicts that cyclical variations in employment will involve countercyclical variations in consumption expenditures. As an alternative, the paper suggests that analysis of friction in the process by which markets are cleared can provide a more satisfactory theoretical basis for the causal relationship between aggregate demand and employment.