Directed search without price directions

Abstract

We present a simple directed search model of the labour market in which workers’ outside options play a key role. Two versions of the model are considered: one exact, with finite numbers of workers, and one in the limit where the number of workers approaches infinity. The second version is an approximation of the first. We examine the effects of a set of government policy parameters and find that most of the influence of these parameters occurs through the channel of workers’ outside options. This channel is fundamental in this model, and absent from others in the literature.