The 2010 Nobel Memorial Prize in Economic Science was awarded today to Prof. Peter Diamond of MIT, Prof. Dale Mortensen of Northwestern, and Prof. Christopher Pissarides of the London School of Economics, for their work on–in the broadest sense–markets where buyers and sellers face obstacles in finding each other. In economic jargon, this is known as “search costs” (the costs of searching out the most desirable buyer/seller when you’re a seller/buyer), but more specifically the work for which they were awarded the prize relates to labor markets and the obstinate problem of unemployment.
According to the official announcement:
The award’s official name is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The money, 10 million kronor ($1.5 million), a gold medal and a diploma, will be handed out to the laureate at a Stockholm ceremony on Dec.10, the anniversary of Nobel’s death.
“Why are so many people unemployed at the same time that there are a large number of job openings?” the Academy Sciences wrote in the statement today. “This year’s laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.”
Here’s coverage in the NYT, WSJ, Bloomberg, and FT.
The key to their work was going beyond the macro statistics, which try to explain unemployment as a unitary phenomenon, and get down into “the weeds” of how the labor market actually works. Here’s the best concise summary I’ve found so far:
A key breakthrough was to realize that the problem was not how to explain unemployment per se but rather how to explain hiring, firing, quits, vacancies and job search and to think of unemployment as the result of all of this underlying microeconomic behavior. Notice that the underlying behavior involves not just workers looking for jobs but also employers looking for workers so explaining unemployment would require a theory of job search, worker search and matching and each aspect of the theory would have to be consistent with every other aspect; i.e. how much workers search depends on how much employers are searching (e.g. advertising) and vice-versa and also on the quality of matching and all of these considerations need to be addressed together. It was Mortensen and Pissarides in particular, building on work by Diamond, who built just such a consistent model.
A very surprising empirical fact helped to motivate this perspective: even in a recession millions of jobs are being created every month. The figures we usually hear about the number of jobs created is the net figure but in the United States in August, for example, there were 4.1 million hires (and 4.2 million separations). Thus, as noted above, understanding unemployment requires understanding these much larger flows of job creation and destruction.
Why do I note this, which is information by and large readily available far and wide?
Simply to underscore my lifelong belief–well, at least since my undergrad days, OK?–that economics is very much a work in progress. Many of the old orthodoxies no longer apply (if they ever did), and as the art and the science of the discipline advance, we are finding that (I generalize) generalizations fail to have any meaningful predictive value and only local, nuanced, subtle and fact-specific analyses of individual markets, sensitive to their historical path dependencies, have explanatory power.
This, to me, makes it ceaselessly fascinating, if at times frustrating and boneheaded in the feckless certitude of too many of its more vocal practitioners.
So we have the headline news late last week that the “economy lost nearly 100,000 jobs” when the reality is that it created 4.1 million jobs for new hires at the same time it was shedding 4.2 million jobs for existing employees (voluntary and involuntary included, of course). Two very different realities.
