SEARCH THEORIES - A BRIEF' HISTORICAL OVERVIEW
A search theory of unemployment is found even in the writings of A. C. Pigou in the inter-war period. To explain the high unemployment prevalent at that time Pigou used an idea you are very familiar with - that workers are unemployed because wages are too high. Keynes contested this idea in the development of his General Theory of Employment, Interest and Money. But initially Pigou had tried to explain the high unemployment of the inter-war period with reference to another idea - the idea of frictional unemployment, where unemployment arises as workers shift between jobs, moving to jobs where their productivity is higher. Search and matching unemployment is actually a form of frictional unemployment - unemployment which arises because of the frictions in shifting between jobs generated by the fact that skills are to be matched with vacancies in the job 'market'. Pigou himself was aware though that jobs were not shifting around too much in the 1920s, so that he ultimately banked more on 'workers pricing themselves out of the market through trade union activities' as an explanation for the inter-war unemployment.
The idea of search unemployment was subsequently formalised in the 1970s and 1980s to make the neoclassical Walrasian model accord with the reality of the empirically observed and varying unemployment in the labour market, as has been indicated to you in the introductory section. The importance of search in decentralised markets was first emphasized in an influential book edited by Edmund Phelps in 1970 (Microeconomic Foundations of Employment and Inflation Theory, Norton, New York). This book contains some of the first formal models using search theory to explain unemployment as an equilibrium phenomenon. Lucas and Prescott presented in 1974 a general equilibrium model of unemployment. In this model stochastic sectoral shocks induce workers to move between sectors, but there is a one-period lag by workers in moving between sectors, brought about through search and matching kind of considerations. Unemployment is generated in the model by this lag.
In the 1980s, search models were built up as .continuous time general equilibrium models, in the tradition of the models built under the real business cycle theory. Noteworthy amongst these are the models by Peter Diamond: the paper titled "Mobility Costs, Frictional Unemployment, and Efficiency" published in the Journal of Political Economy in 1981, and by Christopher Pissarides: the paper titled "Short-Run Equilibrium Dynamics of Unemployment, Vacancies, and Real Wages" published in the American Economic Review in 1985. We have reproduced the titles of the papers for you because they provide a flavour of the concepts and mechanisms used to rationalize unepployment as an equilibrium phenomenon in a Walrasian model.