Nobel 2010

11 October 2010 at 8:40 am Peter G. Klein 13 comments

| Peter Klein |

I hope to have something intelligent and interesting to say about this year’s prize to Diamond, Mortensen, and Pissarides — not as much as last year, of course — but for now I just have a small snark. Here’s me, a couple of weeks ago:

It is said that when the Nobel Prize in economics was first established, prizes were given for using economics to teach people things they didn’t already know, e.g., that economic growth might increase inequality, that depressions are caused by central banks, that macroeconomic stabilization policy doesn’t work, etc. Now, prizes are given to economists who teach other economists things that regular people already know — politicians are self-interested, you shouldn’t put all your eggs in one basket, institutions matter, different people know different things, etc.

From today’s official press release, on the Laureates’ subject matter:

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

Addendum: In other Nobel news, Maurice Allais passed away this weekend. I was going to blog something about Allais and the Austrians but Alex Tabarrok beat me to it.

Addendum II: Here’s a nontechnical summary of some of the Laureates’ contributions from Sandeep Baliga.

Entry filed under: - Klein -, People.

Mises Quote of the Day We Resemble That Remark

13 Comments Add your own

1. Per Bylund | 11 October 2010 at 9:41 am

You forgot to mention that the “both job vacancies and unemployment on the labor market” statement implies a shmoo view (that’s what you would call it, right?) of either labor factors or the jobs available (or both?). Last time I checked, it wasn’t because of search costs that the unemployed construction worker didn’t get the job as chief engineer at NASA…
2. Richard Ebeling | 11 October 2010 at 10:19 am

This year’s recipients suffer from the fallacy of Adam Smith’s “man of system” (the social engineer).

They presume to know how long people should be unemployed to assure they are matched up to the “right” jobs, through unemployment insurance and retraining expenses.

Again, the benchmark is a hypothetical “frictionless” market in general, and labor market in particular, in which people would know things instantly and “costlessly.”

Then, when actual markets “fail” to meet up to this standard, the only “solution” is wise and impartial government intervention to set things right.

The more mis-directed economic thinking changes, the more it stays the same.

(Sorry, if I seem to have a “bad attitude,” but it comes from looking at the world through more realistic “Austrian” glasses.)

Richard Ebeling
3. Kris | 11 October 2010 at 2:58 pm

Ricard Ebeling, can you explain how the labor market looks like through the realistic “Austrian” glasses? Does the “discovery procedure” that beautifully operates in the markets for goods and services also operate in the labor market? If yes according to you, can you tell us how? How precisely is knowledge discovered in the labor market? Also, can you mention any paper in which this year’s Noel prize winners seem to “presume to know how long people should be unemployed to assure they are matched up to the “right” jobs, through unemployment insurance and retraining expenses”? Thanks.
4. FC | 11 October 2010 at 3:34 pm

Kris:

A man walks into an employment agency but is told there is no job for a PhD in widget inspection. Meanwhile down the street, a factory wants a widget inspector but does not know of the man or the employment agency. But even if all three parties were matched, the man wants a salary of $2, the factory can only pay $1, and the lawful minimum wage is $3.
5. Kris | 11 October 2010 at 3:38 pm

If I may raise one other issues: I do agree with you that the benchmark used is a hypothetical frictionless market, and thus not a “realistic” picture of the market. But, don’t the Austrians also refer to a not less unrealistic standard or benchmark when they repeatedly talk and write about what the market would look like in the total absence of government intervention? Why can Austrian refer to a standard or a benchmark and not neoclassical economists? The simple answer would be that the suppression of government intervention is more “realistic” than transaction and search costs that cannot be reduced to zero. But that would leave intact my point that Austrians also use a benchmark.
6. Richard Ebeling | 11 October 2010 at 5:20 pm

“Kris”:

Of course, information must be acquired and “search” takes time.

But that is the case in every extended market for everything.

We used to presume that people looking for work — in the “old days” — had to primarily rely upon “want ads” in the newspapers or word-of-mouth contacts or referrals.

Today, there is a vast network of informational sources via the internet and employment agencies (online and off line) that have the self-interested profit motive to “match” willing workers with desiring employers.

What individuals may, unfortunately, discover is that they do not have the skills and or experience potential employers are looking for. (Economists have long referred to this as “structural” unemployment.)

This requires potential employees to find ways to “re-skill” themselves. This, alas, cannot happen over night in many instances. And this can be intensified for some individuals the more “human capital”-specific their educational and experience background may be.

(When the NASA started scaling back, when the space program was “down-sizing a several decades ago, there were numerous stories of aerospace engineers who had to make ends meet driving taxis, since, given their job-specific skills, that seemed to be their “next best alternative” in some cases.)

Some workers are reluctant to move, or accept a lower salary, or resist the reality that their skills are not in as great demand as before. So they keep “hanging on,” hoping and waiting to see if “someone,” “somewhere” will need and realize the value of their “special” talents.

Then, some employers are reluctant to rehire or add to their work force because of uncertainties about market conditions that might indicate and justify adding to their work force and expanding production.

(I consider that in the present circumstances government policies of various and sundry sorts are intensifying this uncertainty and reluctance on the part of potential employers.)

Then there are the perverse incentives of unemployment insurance that reduce the motive and need for people to more aggressively be active in their search for employment. (This has been understood rather clearly since, say, Stigler’s “economics of information” and search theory.)

Then there are institutional barriers to employment opportunities. That is, minimum wage laws and trade union restrictions. Here in Michigan, where I live, the existence of the “closed shop” and related union “barriers” delay and inhibit gains from trade from labor market “matching.”

In my view, these types of factors explain most of the “problems” and delays in labor “matching.”

I might mention that on the general nature of underlying causes of unemployment and its potential persistence, W. H. Hutt’s “The Theory of Idle Resources” is still a valuable source. (Axel Leijonhufvud referred to this work, once, as the “locus classicus” on the issue of unemployment.)

Our knowledge of things economic, of course, is never complete. And new insights and understandings are always desirable. But these types of factors, I believe, still form the “gist” of the comprehending many (if not most) of the “matching” problems of the labor market.

Richard Ebeling
7. srp | 11 October 2010 at 6:55 pm

Formal search models in the labor market do capture the impact of unemployment insurance, say, on the equilibrium rate of unemployment. They also get at some paradoxes of stimulus–if I think employers will be hiring more later I may hold out longer for a better job, thereby lengthening my unemployment spell (and raising the aggregate unemployment rate)–that act like negative “animal spirits” on the labor market.
8. Congratulations…but let’s not over do it « Truth on the Market | 11 October 2010 at 8:34 pm

[…] colleague, Peter Klein, over at O&M has offered a little more crude assessment of the economics Nobel Prize in general, and this year’s award in particular. In short, Peter […]
9. Joe Mahoney | 11 October 2010 at 10:37 pm

Peter Diamond quote for today:

Standard “economic models … [treat] individuals as playing a game with fixed rules, which they obey. They do not buy more than they know they can pay for, they do not embezzle funds, they do not rob banks” (1971, p.31).

Diamond, P. (1971). Political and economic evaluation of social effects and externalities: A comment,” in M. Intrilligator, ed., Frontiers of Quantitative Economics. Amsterdam: North-Holland Publishing Company, pp. 30-32.
10. Kris | 12 October 2010 at 2:23 am

Richard Ebeling, thank you for your reply.

As for the distinction between old days and today, I do agree with you that there are several private employment agencies that exist today. There was an entrepreneurial opportunity here that has long waited to be acted upon, either because of government monopoly in this area or because entrepreneurs did not think that there was a profit opportunity here.

As far as government intervention in the labor market is concerned, while I might agree with you, let me add that the three laureates were awarded the prize not for calling for government intervention in the labor market as your first post might suggest, but for the study of the search process (something which Austrians should applaud being given their focus on processes).

Hutt’s “theory of idle resources” is indeed a classic on the issue of unemployment.
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12. Daniel Kuehn | 13 October 2010 at 5:06 am

Richard, could you clarify where the laureates “presume to know how long people should be unemployed to assure they are matched up to the “right” jobs, through unemployment insurance and retraining expenses.”? I wasn’t aware they had claimed to know this.

What’s most unfortunate about criticism of them is that your response to Kris is highlighting precisely the factors that they highlight and that they won the Nobel prize for. I think you probably agree with them more than you think you do. There’s no need to make claims like they know how long people should be unemployed.
13. Daniel Kuehn | 13 October 2010 at 5:07 am

Haha – “precisely” should have been bolded, not the rest of the paragraph :)