DP883 | Why People Don't Find Work


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This paper provides a brief, non-technical survey of the major theories about why people remain unemployed. The aim is to provide a macroeconomic perspective on the microeconomic problem of why people don't find work. The first section deals with market-clearing theories: the natural rate hypothesis, the intertemporal substitution hypothesis, and real business cycle theory. The second section deals with imperfect information as an impediment to finding work: search theory, implicit contract theory, and efficiency wage theory. The third section concerns labour market institutions as sources of unemployment: labour unions, supply shocks combined with real wage rigidity, and automation and trade combined with real wage rigidity. The fourth and fifth sections deal with deficient demand and labour turnover costs as sources of unemployment. The final section deals with unemployment dynamics.