One of the newer concepts that can be applied to the labour market is the so-called Diamond-Mortensen-Pissarides model. The authors analysed markets in general on which there are so called transaction costs and the need to find supply and demand match (most models do not consider transaction costs at all). They also belong among the pioneers of the search theory.

As Zajíček (2010) notes, the impulse for application of the theory to the labour market was the thought of P. Diamond that the inclusion of at least part of the transaction costs into the economic model (cost of searching for market opportunities because information is not for everyone and not for free) explains a number of phenomena on the market without departing from the assumptions of competitive markets – the idea was developed in the 70s of the 20th century. It brought two major findings:

  1. the very existence of the searching costs of market opportunities is not enough to replace one equilibrium price by many different prices;
  2. even the minimal searching costs deflect the final equilibrium price far from the price assumed by the neoclassical model (ranging on levels that correspond to the pricing monopoly entity).

Mortensen and Pissarides applied this concept on the labour market. The supply side consists of potential employees standing before the choice whether to accept or reject the offered position (and continue searching). Similarly, on the demand side – to accept or reject the offer of labour force (and look for better, more profitable…). Any decision indicates the existence of transaction costs, i.e.: if the worker accepts the job, then they are costs expended on a possibly better work position in future. If the worker refuses, the cost is the lost income form the rejected job. The decision is, of course, influenced by the specific labour market situation in time and place – the number of vacancies in other locations, the structure of vacancies, salary or unemployment benefits, etc. can play a role here.

One of the conclusions of the model is the finding that the higher unemployment benefits, the higher the number of the unemployed and the length of their unemployment. It can be put into the context of the Beveridge curve which shows the relationship of the unemployment rate and the number of vacancies; it is empirically shown that periods of high unemployment are accompanied by a low number of vacancies and vice versa – this is the result of varying economic cycle and its impact on decisions made by people on the labour market. If costs of unemployment do not grow, the curve is extending. Therefore, it is recommended not to use the unemployment benefits but rather use a policy known as ‘matching’ – mutual consensus which can be represented by e.g. efficient collection of information on job vacancies and jobseekers.

Another conclusion of the discussed model is as follows: searching costs are accompanied by several equilibriums which are variously advantageous for various participants. When factors on the labour market are moving, there may arise situations which deny the Beveridge curve – e.g. proved periods of concurrent increase of unemployment and growth of the number of job vacancies. According to the DMP model, this is caused by changes in human behaviour in response to changing conditions when deciding on a competitive market (change in recruitment, etc.).