ABSTRACT
The purpose of this chapter is to devise a model of the operation of the labor market that is more useful for macroeconomic analysis than the framework presented in Ch. 2. First, we will concentrate on deriving the optimal number of hours per worker when they all have common hours. Since the requirement for common hours limits the choice available to any individual, a reservation-wage model of labor-force participation will be developed. Then, the focus shifts to the demand for workers, each one providing a fixed number of hours. Even in a smoothly functioning labor market, it is usually observed that firms are unable to fill all the vacancies that they have. The fact that vacancies and unemployment exist side by side will become the basis for the natural rate of unemployment. Finally, the issue of disequilibrium transactions will be explored. Because only a small minority of participants suffer from disequilibrium, it will become obvious why transactions continue to be made in this state.
