A Prize for Unemployment

by on October 11, 2010 at 8:30 am in Uncategorized | Permalink

The 2010 Nobel Prize awarded to Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides can be thought of as a prize for unemployment theory.

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.

Calibrating the (Diamond)-Mortensen-Pissarides model and embedding it in a dynamic real business cycle model to see if it can match the facts has been a key aim of recent work (see also here and Robert Shimer's work).

Search theory has been applied extensively to the labor market but the same type of theory can be used to understand any issue in which matching is important such as marriage markets and the housing market.  

See Tyler for many more details on Diamond, Mortensen and Pissarides.

1 Luke G. October 11, 2010 at 4:37 am

Is this really the "2011" Nobel Prize rather than the 2010? I'm not trying to be snide here–is that really the convention??

2 WindyCityEagle October 11, 2010 at 4:42 am

Good to see a fellow Tartan bringing home the Nobel Prize.

3 Sam October 11, 2010 at 5:25 am

Wenzel deconstructs the prize and says the things that Alex and Tyler only wish they had the balls to say:
http://www.economicpolicyjournal.com/2010/10/sver

4 Morgan S. Warstler October 11, 2010 at 10:33 am

If you accept that New Companies are where the new jobs are being created…

I think it points towards a policy of trying to increase jobs turn-over. Meaning we want to go from 4.1 million hires / 4.2 million separations to
6M hirings.
http://www.bls.gov/opub/mlr/2010/05/art3full.pdf

Looking over this, it is obvious that policies trying to keep the old companies around – fighting a rearguard action, trying to SAVE jobs decrease turn-over, and hurts job growth over all.

5 Andy October 11, 2010 at 12:50 pm

Whoops. To clarify, Shimer's finding has taken his name, but he did not christen it after himself.

It is slightly ridiculous because it's just an answer to the question "Does this approach work?" The answer is "no". What's the puzzle exactly? I suppose it lies in the details of why not, but nonetheless.

6 Swedo October 12, 2010 at 1:03 am

There is no Nobel Prize in Economics.

7 Digital Photo Frame October 18, 2010 at 2:07 am

Thay's interesting! Digital photo frames are common in 7 inch (17.8 cm) to 20 inch (50.8 cm) sizes. Some digital photo frames can only display JPEG pictures. Most digital photo frames display the photos as a slideshow and usually with an adjustable time interval. They may also be able send photos to a printer. Digital photo frames typically display the pictures directly from a camera's memory card, though certain frames also provide internal memory storage. Some allow users to upload pictures to the frame's memory via a USB connection, wirelessly via bluetooth technology. Few are able to send photos with cellular connectivity. Some frames allow photos to be shared from a frame to another.

8 StillTitled October 20, 2010 at 8:22 am

The prize-winners' work on search markets showed that some markets are messy, and messy markets dumbfound classical economics.

Markets are supposed to provide unique and efficient outcomes. Search markets don’t, but they don’t resist analysis. The recipients demonstrated this with the DMP model for unemployment. But the model also demonstrates the importance of regulation and policy to affect market structure and improve outcomes. This is far from a laissez-faire point of view so commonly held. Though the recipients focused their efforts on the labor markets, the common features they identified in search markets provide a metaphor for understanding other conventional economic markets and, perhaps, non-traditional markets: the process of finding a spouse or even the metaphor of the marketplace for ideas – a concept still reeling from the controversial Supreme Court opinion on Citizens United v FEC.
http://stilltitled.com/2010/10/13/search-markets-

9 christmas thank you November 21, 2010 at 10:46 pm

Its great resource. i was finding that type inf and now i get it.thanks for this…

10 car gps December 16, 2010 at 12:43 am

Markets are supposed to provide unique and efficient outcomes. Search markets don’t, but they don’t resist analysis. The recipients demonstrated this with the DMP model for unemployment. But the model also demonstrates the importance of regulation and policy to affect market structure and improve outcomes.

11 eve isk March 7, 2011 at 8:43 pm

In this world there is always danger for those who are afraid of it.

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