A Model of Competition Between Unemployed and Employed Job Searchers: An Application to the Unemployment Outflow Rate in Britain

Until the late 1960s almost all of the analysis of unemployment was concerned with the stock of unemployed. Since then greater attention has been paid to the flows into and out of unemployment. In recent years one of the most popular models for analyzing the unemployment outflow rate has been the matching model. An analysis extends this literature by proposing a model that fits the facts better. The analysis' main contribution is to highlight the role played by employed job searchers and the central importance of the endogeneity of employed job searching. Incorporating this changes the dynamics of the labor market in a number of interesting ways. If there is an increase in the number of job offers, this would raise the unemployment outflow by an equal amount in the standard model. However, if the employed can search for jobs, then the increase in offers tempts more of them to search, thus creating more competition for the unemployed job searchers, who are partially crowded out of the new jobs, and the outflow rate increases by much less than the one-for-one.