>> Okay. Let's wrap up.
We've developed a theory in terms of a model
that represents how individuals look for work.
Any individual gets offers randomly over time.
And when they're acceptable, they transit
from unemployment to employment.
While working, sometimes they have the misfortune
of being laid off and transit in the other direction.
This theory can be used to talk
about the unemployment rate in the economy.
At any point in time, there will be some fraction
of the population working and some fraction not working,
and people will move back and forth.
But the system tends
to gravitate towards the natural rate of employment
which stays constant over time,
even though individuals are moving back and forth.
This looks a lot different from the classical theory.
There's no supply and demand diagrams,
although they are related - workers looking
for work are supplying labor.
The interesting thing about search theory is
that search is a productive activity.
Holding out for a better job is good.
Now, you don't want to hold out forever.
At some point, you've got
to stop searching and start working.
We determined theoretically exactly what you should do:
choose a reservation wage and accept when a job gives an offer
above the reservation wage.
It's still not all the way there vis-a-vis the classical theory,
because we've got workers looking for jobs.
We still want to build in the other side
of having firms looking for workers.
That's the subject of the next lecture.
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