In a very good post, John Quiggin talks about some of the problems that have cropped up with labor search models. Personally I think labor search models are awesome, since - unlike most business-cycle models - they actually try to take into account the way economic actors behave in the real world. There's generally a "matching function" that tries to describe the technology that job-seekers and companies use to find each other - newspaper ads, human networks, websites, or whatever. Quiggin is right that changes in this technology itself are not enough to explain all the changes we see in employment and unemployment. More important might be the ways that people decide whether to take a job or to keep searching. For just a taste, see this paper by Mike Elsby and Matt Shapiro, which tries to model the fact that people get experience when they work. That is probably what Kartik Athreya meant when he wrote that "search models aren't really about search."
So search models still haven't fully explained employment patterns. What mental model of unemployment should we have in the meantime? At the end of his post, Quiggin writes:
If search models aren’t the right way to think about unemployment, what is the right way? The simple answer is that unemployment is primarily a problem of macroeconomics not of labor markets. If aggregate demand is far below the productive capacity of the economy, workers will be unemployment and capital will be idle.This is a simple answer, since it basically just thinks of the economy as an AD-AS model, and unemployment as being determined by Okun's Law or a short-run Phillips Curve. Economists are used to thinking in terms of supply and demand, so the AD-AS model comes naturally to mind. Inflation and output are both low, which looks like a negative demand shock on a supply-and-demand graph, so we look at the economy and say "it's a demand problem".
But on a deeper level, that's unsatisfying - to me, at least.
First of all, what causes aggregate demand curves to shift? You could have a monetary policy regime change. You could have a liquidity preference shock, possibly produced by financial market disruptions. You could have some kind of news about future productivity, or some kind of confusion about which sector is going to do well. You could have swings in sentiment - pure "animal spirits" - that become self-fulfilling prophecies. Really, you could have all kinds of stuff. This question is interesting, since different determinants of demand will entail A) different ways to predict recessions, B) different ways to prevent recessions, and C) different ways to combat recessions.
Second of all, how does aggregate demand affect unemployment? The usual explanation for this is downward-sticky nominal wages. But why are nominal wages downward-sticky? There are a number of explanations, and again, these differences will have practical consequences.
(Third of all, is an AD-AS model really a good way of modeling the macroeconomy? Supply-and-demand has its uses, and is sort of the iconic model of economics, but it has its limitations. The curves might exhibit hysteresis, for example, or randomness. The idea of abandoning the friendly old X of supply-and-demand is scary, I know, but maybe it just isn't the best descriptor of booms and recessions.)
So I'm not really satisfied by the practice of putting "demand in the gaps". If "demand" is not to be just another form of economic phlogiston, we need a consistent, predictive characterization of how it behaves - its causes, its effects, and its domain of validity.