Information and entropy in the labor market: Frictional and involuntary unemployment and the neutrality of money

Abstract We re‐examine the concept of involuntary and frictional unemployment and the neutrality of money in a statistical equilibrium model of the labor market in which boundedly rational workers' and employers' interactions have a non‐zero impact on wages. From this perspective both the degree of involuntary unemployment and the neutrality of money depend on the adjustment of both expectations of the average level of wages and prices and the further adjustment of anticipations of the scale of fluctuations in prices and wage offers. Shocks to the economy can produce new long‐run equilibrium levels of unemployment and short‐run increases in involuntary unemployment arising from unevenness in the adjustment of expectations.