Job search is an integral part of the labor market. The idea of job search was first introduced by Burdett and Mortensen (1978). Originally, the search theory was formulated to analyze unemployment. The idea of job search has been incorporated in the models of McCall, 1970, Fields, 1975, Fields, 1989, Majumder, 1975, Stark, 1982, Adam and Cletus, 1995, Postel V. and Robin, 2002, Dolado et al., 2009, Hussey, 2005, Sheng and Xu, 2007, Flinn and Mabli, 2008, Arseneau and Chugh, 2009 and Macit, 2010.
McCall (1970) used the job search theory as a standard tool for analyzing the decision making process of a jobseeker. Fields (1975) considers three types of job-search: job search from the agricultural sector, job search from the urban informal sector and full-time job search. Fields (1989) extends his earlier model to distinguish between ex-ante job search and ex-post employment. Stark (1982) explains job search in a two period planning horizon where search technologies are not sector independent. Adam and Cletus (1995) present a simple model of job-search where an unemployed worker receives job offer, but he takes decision on whether to accept this offer based on a set of criteria. Postel-Vinay and Robin (2002) explain wage increase in terms of job search and bargaining theory. Dolado et al. (2009) consider a matching model with heterogeneous jobs and workers which allows for on-the-job search by mismatched workers. Hussey (2005) develops a general equilibrium business cycle model with on-the-job search and wage rigidity arising from long term labor contract. Sheng and Xu (2007) develop a simple two sector search model to examine the impact of the terms of trade (TOT) shocks on unemployment and they show that an improvement of TOT reduces unemployment. Flinn and Mabli (2008)analyze the impact of binding minimum wage on labor market outcomes and welfare in a partial equilibrium model of matching and bargaining in the presence of on-the-job search. Arseneau and Chugh (2009) introduce general equilibrium efficiency in the standard labor search and matching framework. Macit (2010) develops a New Keynesian model in search and matching structure with firing costs and he shows how labor market institutions affect the wage and inflation dynamics.
Another important concept in job search is the ‘graduation theory’, according to which, it is beneficial to remain in the urban informal sector1 and search part time for a highly paid job in the urban formal sector. However, this theory fails in the following circumstances: if the urban formal sector directly recruits from the rural sector (see Majumder, 1975), if urban informal sector workers prefer self employment to an urban formal sector job (see Squire, 1981) or if urban informal sector workers think of an urban informal sector job as a permanent source of income (see Sethuraman, 1981).Moreover, most of the theoretical models on the graduation theory adopts partial equilibrium analysis. Yet there are many factors, such as an imbalance of supply and demand in the analysis of the development of a Less Developed Country (LDC), intersectoral linkages etc., that partial equilibrium analysis cannot address. So, it is desirable to conduct a more general equilibrium analysis of job-search in order to highlight the process of job searching.
This paper builds on the two-sector labor market model of Fields, 1975 and Fields, 1989, by introducing capital and international trade into Fields' framework. Fields (1989) argues that distinguishing between ex-ante and ex-post allocation of the labor force is important for understanding the effects on the unemployment rate. He finds that as long as rural migrants have a positive probability of finding a job in the urban sector, ex-ante and ex-post labor forces will differ, affecting the unemployment rate. In particular, Fields (1989) argues that in this setup, “given a constant agricultural wage, a more efficient on-the-job search from agriculture lowers the urban unemployment rate in equilibrium”. However, unlike Fields (1989), we assume a flexible and market determined rural sector wage. The present paper examines the role of search intensity and the inflow of foreign capital on unemployment and on social welfare. In particular, it attempts to show that in a job-search model for a small open economy with two factors of production, labor and capital, some of the results obtained in Fields get altered dramatically if capital is mobile across the sectors.
