A Nobel aim – to find the right match and reduce the poison of long term unemployment

Hi everyone, I’m the new guy on board. I started at M&G last week but the rest of the team is already working really hard to find me a ridiculous nickname.

Yesterday morning, I saw a familiar face in the news. My macroeconomics professor at LSE, Christopher Pissarides, had just won the Nobel Prize in economic sciences (jointly with Dale Mortensen and Peter Diamond). On top of being an exceptional scholar, I have to say that he is also a very good teacher and a very humble and approachable person, sometimes laughing at his own basic arithmetic mistakes while lecturing.

The search and matching theory that the laureates developed models how we end up with outcomes where unemployment persists even though there are job seekers willing to work for a wage that employers are willing to pay.

This theory on the frictions in labour markets is of particular interest in today’s economic environment. The post-recession unemployment rate in the US (9.6%) and the EU (10%) shows little sign of improvement and raises concerns about the speed of recovery.  As Carmen and Vincent Reinhardt pointed out in their research looking at historical slowdowns, in the decade after an economic crisis in a developed country, growth remains lower and unemployment higher than its pre-crisis level. This implies that part of the cyclical components of the recession becomes structural.

The centre-piece of the search and matching model, the matching function, intuitively suggests that if the duration of unemployment is large there will be more mismatching in the labour market:

M = m . U n. V n-1

Where M is the number of matches, U is the number of unemployed workers, V the number of vacancies and m and n are constants. Note that m has a negative relationship with the duration of unemployment (falling when the average duration of unemployment rises).

This leads us to think about the problem of the duration of unemployment, which has risen dramatically since the beginning of the crisis, from an average of 17.3 weeks in December 2007 to 41.7 weeks in September 2010.

The central message Pissarides shared with the world on the day he received the Noble prize is clear: “One of the key things we found is that it is important to make sure that people do not stay unemployed too long”.

Long term unemployment is one of the major factors explaining the persistence in the unemployment rate as workers lose their skills and knowledge, and above all their motivation. Pissarides argues that government subsidies should be used to help companies to hire people back and benefits should be accompanied with conditions that encourage people to find a job much quicker. These policies may help to reduce the so called frictions. The Fed is aware that QE is too blunt an instrument to directly address current employment distortions – but with no political consensus for fiscal action, I fear that Pissarides’s message will go unheard. In other developed economies, austerity measures are likely to include cuts in government subsidies rather than increases, which risks letting unemployment become entrenched.

Discuss Article

  1. Ken Barker says:

    In an environment where the global population is rising rapidly, technological change is fast but unpredictable m and n cannot possibly be constant.  In essence the formula either makes a reasonable pass at hindcasting unemployment or it claims to predict the future.  In either case would I use it as a basis for investment decisions? No.

    The drivers of our global economy are immensely complex, I don't think it is fair to pretend that any simple formulas apply to any element.  UK unemployment alone probably has a hundred co-variables.

    Why is it that only engineers know this?

    Posted on: 12/10/10 | 12:00 am
  2. PlumedHat says:

    It's a well-meaning article, but unemployment has little to do with maths and much to do with a widespread lack of skills and employability in the established workforce and amongst school leavers & graduates. You'll get a better letter in English from a German office than an English office. Look at the immigrants who make it the UK; without them we would be more bust than we are already. Unhappily, we cannot live off excuses and theories any more.

    Posted on: 12/10/10 | 12:00 am
  3. Davis Jones says:

    In my opinion, unemployment exists because there is a myth that the world is capable of "creating" and "destroying" jobs. The fact is that human endeavour has to be directed by some idea that is capable of unifying a lot of people behind some purpose. Right now, the internet is a pretty cool thing and there are a lot of folks that are interested in developing it further, hence more jobs. But for intellectually disinterested individuals, they have to wait for some enterprising group of people following an idea to employ them and tell them what to do, and there aren't that many good ideas floating around right now – especially ones that require a large amount of human labour, so the amount of "jobs" for humans is shrinking.

    The problem we have is that most people in the developed world assume some sort of social contract, which means to most people that everyone should be able to live life with a somewhat similar quality of life to the people around them. So, people need to find a way to justify what are essentially transfer payments to people for doing menial jobs so that the menial job-doers can attain that somewhat similar quality of life. But when the menial tasks aren't needed as much anymore, it is hard to economically justify paying people for "jobs" that don't need to be done.

    If you want to see an example of this, go to eat out in China. There is a waiter for every table. Is that really a "job" for those waiters? It's really just a way for the government to compel owners of businesses to spread the wealth to more of their fellow countrymen.

    Jobs are really about human endeavour moving forward. That's what brings people in to the labour market and really employs them. I think a stronger science –> business connection would help "create jobs" but science isn't the source of all knowledge either. The fact of the matter is that the real development of the world that requires work that is done by uneducated people is happening in the "developing nations" by and large, not the "developed ones" hence the moniker "developed."

    Posted on: 17/10/10 | 12:00 am
  4. thomas says:

    Thanks for the info. I found it really useful.
                                                               Thomas sabo

    Posted on: 06/11/10 | 12:00 am

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